Costa Vraca v Bell Regal Pty Ltd [2003] FCA 65 | Case summary

REASONS FOR JUDGMENT Introduction 1 Each of the applicants in the eight proceedings before the Court carries on the business of growing and selling tomatoes. In the 1998-1999 tomato growing season the applicants claim to have suffered financial loss as a consequence of their tomato crops being infected by bacterial canker. The applicants claim that the source of the bacterial canker was "Daniela (FA 144)" Hybrid Tomato seeds ("the Daniela seeds") produced in Israel by the second and third respondents ("the Hazera respondents") and supplied by those respondents to their exclusive distributor in Australia ("Lefroy Valley"). Bell Regal Pty Ltd ("Bell Regal") and Gumrange Pty Ltd ("Gumrange") are companies in the Lefroy Valley group of companies which sold the Daniela seeds to the applicants in Victoria and Queensland respectively. 2 The applicants claim that they suffered financial loss by reason of: · the negligence of the Hazera respondents and of contraventions by those respondents of ss 52 and 53(a) of the Trade Practices Act 1974 (Cth) ("the TPA"); · contraventions of ss 52 and 53(a) of the TPA and breach of contract by Bell Regal and Gumrange. 3 In six of the proceedings the applicants claimed that their loss was also caused by the fourth respondent ("Coralberry"), the supplier of "Sporekill", a spray which the relevant applicants allege was sold to them on the basis that it would eradicate all known types of bacteria, including bacterial canker, in their tomato crops. 4 The Hazera respondents are Israeli companies and could not be served with the originating process in Australia. Accordingly, the applicants were required to obtain leave of the Court under O 8 r 2(2) of the Federal Court Rules 1979 (Cth) ("the Rules") to serve the Amended Application and the Amended Statement of Claim on the Hazera respondents outside the Commonwealth. The Hazera respondents were duly served in Israel pursuant to leave given under O 8 r 2(2) on ex parte applications made on behalf of each of the applicants. 5 The Hazera respondents have applied to the Court under O 9 r 7 to set aside service of the originating process upon them on the ground that the requirements of O 8 r 2(2) have not been satisfied. Relevantly, the rule provides that leave to serve the originating process outside of the Commonwealth can be given: "..if the Court is satisfied that: (a) the Court has jurisdiction in the proceeding; and (b) rule 1 applies to the proceeding; and (c) the party seeking leave has a prima facie case for the relief sought by the party in the proceeding." 6 The Hazera respondents have also applied under O 9 r 7 to set aside the originating process in each proceeding on the grounds that the Court has no jurisdiction in the matter and no reasonable cause of action has been pleaded against them. At the hearing, the Hazera respondents did not proceed with their strike out application. In the alternative, the Hazera respondents have sought a stay of the proceedings pursuant to O 20 r 2(1)(c) of the Rules, on the ground that the prosecution of the proceedings against them in Australia is unjust as they would be prevented from bringing third party proceedings in Australia against the State of Israel which, through its agency, carried out certain tests in the fields in which the Daniela seeds were grown. The Hazera respondents claim that if the applicants brought the proceedings against them in Israel they would be entitled to bring third party proceedings against the State of Israel. 7 Although the facts of each of the eight proceedings differ in significant respects, the main claims of each of the applicants were founded essentially upon the evidence adduced in the proceeding instituted by Costa Vraca Pty Ltd ("Costa Vraca"). 8 Bell Regal and Coralberry also brought motions for security for costs against the corporate applicants being Costa Vraca, A & F & D Mercuri Pty Ltd ("Mercuri") and Tanrikulu Enterprises Pty Ltd ("Tanrikulu"). Bell Regal alone brought a motion against Eren & Sons Pty Ltd ("Eren") and Gumrange and Coralberry brought motions for security for costs against Banks Farm Holdings Pty Ltd ("Banks"). The applicants' claims against the Hazera respondents 9 The applicants' claims under ss 52 and 53(a) of the TPA are based on representations made both orally, and in the Hazera respondents' catalogue ("the Hazera catalogue") and in a Lefroy Valley brochure ("the Lefroy Valley brochure") relating to: · the quality and yield of tomatoes grown from the Daniela seeds ("the quality representations"); and · the Hazera respondents' quality control systems ("the control system representations"). 10 The representations were alleged to have been misleading because the Daniela seeds were said not to have the qualities represented and the Hazera respondents were said not to have had adequate quality control systems. 11 The negligence claims against the Hazera respondents were based upon the quality representations and the control system representations being negligent misstatements. It was also claimed that the Hazera respondents acted in breach of a duty of care allegedly owed by those respondents to the applicants to take reasonable steps to prevent financial loss to the applicants by ensuring that the Daniela seeds were not infected by bacterial canker. Alternatively, the Hazera respondents were said to owe a duty of care to the applicants to take reasonable steps to make them aware of the risk that the Daniela seeds might be infected by bacterial canker. 12 The TPA and negligence claims are pleaded substantially in the same form against all respondents, although the Hazera catalogue was only given to or read by representatives of Costa Vraca and Mercuri. 13 Finally, although there is an issue as to which of the Hazera respondents might be liable to the applicants, the motions were contested on the basis that no relevant distinction is to be made at this stage between the roles played by those respondents. 14 It is in that context that the requirements of O 8 r 2(2) arise for consideration. Order 8 rule 2(2) 15 The character of the inquiry required under O 8 r 2(2)(c) was described by the Full Court in Caterpillar Inc v John Deere Ltd (1999) 48 IPR 1 ("John Deere") at 8-9 as follows: "The requirement to show a 'prima facie case for the relief sought' was considered in Sydbank Soenderjylland A/S v Bannerton Holdings Pty Ltd (1996) 68 FCR 539 at 549. The full court said: In addition to bringing a case within one of the paragraphs of r 1, an applicant must show a 'prima facie case for the relief which he seeks'. In Merpro Montassa Ltd v Conoco Specialty Products Inc (1991) 28 FCR 387 at 390, in a passage which has been cited with approval on many occasions, Heerey J said: '…the requirement of O 8, r 2(2)(c) has to be met at the outset of the proceedings. It does not suggest the kind of scrutiny that would occur in a submission of no case to answer following the closure of an applicant's case at trial … It may be therefore that a court at this stage might draw inferences more readily in favour of an applicant, bearing in mind, among other things, that the applicant will not have had the advantage of discovery, subpoena and other procedural aids to the making out of a prima facie case at trial.' In Western Australia v Vetter Trittler Pty Ltd (in liq) (1991) 30 FCR 102 at 110, after setting out this passage, French J said that 'a prima facie case is made out if, on the material before the court, inferences are open which if translated into findings of fact, would support the relief claimed'. In WSGAL Pty Ltd v Trade Practices Commission (1992) 39 FCR 472 at 476 Beaumont J said: 'Such a preliminary question [… whether a prima facie case exists] should not call for a substantial inquiry. The kind of evidence adduced on a preliminary inquiry of this kind should be in proportion to the nature of such an interlocutory issue … [The] purpose is to determine by way of a mini rather than a mega trial whether the applicant has a prima facie case.'" 16 The Full Court, citing Cell Tech Communications Pty Ltd v Nokia Mobile Phones (UK) Ltd (1995) 58 FCR 365 ("Cell Tech") at 373, also observed at 13-14 that it is sufficient if a prima facie case for relief is made out on one (and not necessarily all) of the causes of action relied upon; cf Tycoon Holdings Ltd v Trencor Jetco Inc (1992) 34 FCR 31 at 35. In Cell Tech (at 374) Lindgren J pointed out that although the statement of claim is useful as a statement of facts and causes of action relied upon, whether a prima facie case is made out on any of the causes of action is to be determined on the basis of the evidence. Thus, a prima facie case for relief may be made out which does not strictly conform to the case pleaded. 17 As I explained in Bray v F Hoffman-La Roche Ltd (2002) 190 ALR 1 ("Hoffman-La Roche") at 10-11, a proceeding to determine whether the requirements of O 8 r 2(2) have been met is an interlocutory proceeding in which hearsay evidence is admissible. 18 The main issues raised by the Hazera respondents' applications, are whether the Court is satisfied that: · the applicants have a prima facie case for the relief sought on the basis of any of the causes of action relied upon by the applicants against the Hazera respondents; · the Court has jurisdiction in the proceeding, in the sense that it has jurisdiction to grant any of the relief sought in relation to the causes of action in respect of which the applicants have a prima facie case. See Hoffman-La Roche at 11. Background (a) Costa Vraca 19 In 1996 representatives of Costa Vraca were given copies of the Hazera catalogue when they attended at the second respondent's display stand at an agricultural exhibition in Israel. The catalogue provided information about each of the varieties of seed produced by the Hazera respondents and stated, inter alia, that the Daniela tomato plant was a "highly productive hybrid with very firm fruit and long shelf-life". The catalogue also stated, inter alia, that the Hazera respondents were long established and prominent seed marketing companies that employed: "State-of-the-art Quality Control systems ensuring that only top quality seeds are marketed to our customers' full satisfaction." 20 Costa Vraca's representatives were informed by representatives of the Hazera respondents at its display stand that the tomatoes grown by the Daniela seed was their best tomato and the "best tomato in the world". 21 In 1997, after representatives of Costa Vraca visited a number of properties in Queensland and Western Australia where commercial crops of tomatoes were being grown from the Hazera respondents' Daniela seed, Costa Vraca proceeded to plant a trial crop using the seed. Costa Vraca's trial crop resulted in "excellent yields", with no problems "whatsoever" and obtained from them the "highest prices at market". 22 Late in 1997 Mr Josip Balint, a representative of Lefroy Valley, provided Mr Joseph Vraca with a copy of the Daniela brochure. The brochure contained photographs of the Daniela tomato and detailed product information extolling the "[s]uperior yield", "excellent quality" and "[v]ery long shelf life" of the tomatoes grown from the Daniela seed. In addition to the product information the brochure stated that "Hazera have a tremendous depth in technical knowledge for tomato production that is available to growers around the world". The brochure also stated that "All Hazera varieties will be available in original packaging". A Hazera "Quality Seeds" logo was prominently displayed in the brochure. 23 On 29 May 1998 Costa Vraca decided to purchase three million Daniela seeds from Bell Regal. In September or October 1998 it purchased an additional 300,000 Daniela seeds. The seeds were produced by the Hazera respondents in Israel, supplied by the Hazera respondents to their exclusive distributor in Australia, and then sold and delivered by Bell Regal to Costa Vraca in the Hazera respondents' sealed packaging. The packaging describes the seeds as Hazera's Daniela seeds and states their origin is Israel, and notes the Lot number of the seeds and the dates on which the seeds were "Tested" and "Germ Tested" (July 1998 and June 1998 respectively). It is clear that the seeds were intended to be sold and delivered to purchasers or to nurseries nominated by the purchasers in the Hazera respondents' "specially processed packed and sealed" packages. The package marked Exhibit "A3" displayed a guarantee by the Hazera respondents, but stickers placed on the package covered the details of the "guarantee" and other statements on the sealed package. 24 On the instructions of Costa Vraca sealed packages containing the Daniela seeds were delivered to two nurseries to be germinated into seedlings prior to being planted by Costa Vraca at its tomato farm in Victoria. The first commercial planting by Costa Vraca occurred on 6 September 1998, with plantings continuing through to around 12 December 1998. Costa Vraca's 1998-1999 tomato crop, which was grown from the Daniela seed, was infected by clavibacter michiganensis pv michiganensis, known as bacterial canker. As a result of the failure of its Daniela tomato crops Costa Vraca suffered significant financial loss. (b) Mercuri 25 The facts relating to Mercuri are similar. They include a visit to the Israeli Agricultural Exhibition in 1996, representatives of Mercuri being handed the Hazera catalogue and Lefroy Valley Brochure, and a viewing of crops of Daniela Tomatoes in Queensland and Western Australia. In 1997 Mercuri planted a trial crop of approximately 80 acres of Daniela tomatoes for the 1997-1998 season. Approximately ten plants in the trial crop were noted to have what was initially thought to be a "powdery mildew infection", which was subsequently diagnosed as bacterial canker. This problem remained confined to these ten or so plants and did not spread through the trial crop. Otherwise, the trial crop produced "excellent yields". In May 1998 a representative of Mercuri made a further trip to Queensland where he viewed, as part of a "field day", a lot on which Daniela plants were growing and was impressed by how well they had withstood heavy rains. 26 On 4 June 1998 Mercuri entered into an agreement with Bell Regal for the purchase of 1,601,000 Daniela seeds. The seeds were delivered to the premises of Boomaroo Nurseries Pty Ltd in Victoria and the seedlings germinated there were planted on Mercuri's property between 25 September 1998 and 12 December 1998. 27 Signs of unusual wilting in the crop were noted in December 1998. Test results on 28 January 1999 stated that bacterial canker was affecting the crop. Mercuri suffered significant financial loss as a result of the failure of its Daniela tomato crop. (c) Tanrikulu 28 Representatives of Tanrikulu did not go to Israel or receive the Hazera catalogue. Otherwise, the facts were similar to those in Costa Vraca and Mercuri. After representatives of Tanrikulu visited properties in Queensland which were producing Daniela tomatoes, a decision was made by Tanrikulu to trial the Daniela seed for the end of the 1997-1998 growing season. A trial crop of 16,000 to 20,000 seedlings were planted. The seedlings were purchased in October 1997 from Barooga Nurseries. The trial crop was successful. 29 Tanrikulu entered into three separate agreements with Bell Regal for the purchase of Daniela tomato seed: one in May 1998 for 120,000 seeds; one around August-September 1998 for 140,000 seeds; and one around September-October 1998 for 160,000 seeds. The seeds purchased were germinated in Barooga Nurseries prior to being planted between 26 September 1998 to 23 December 1998 at Tanrikulu's farm in Victoria. Signs of wilting were noted in early to mid January 1999. Samples taken of the crop for testing on 28 February 1999 disclosed bacterial canker in the Daniela tomatoes, but no canker in the ground crop of Waratah tomatoes grown at the same property. Eggplants, which are also highly susceptible to canker, grown next to the Daniela tomatoes were unaffected by the canker. Tanrikulu suffered significant financial loss as a result of the failure of its Daniela tomato crop. (d) Rossignuolo 30 Mr Rossignuolo's situation is relevantly similar to Tanrikulu's, with the distinction that he did not plant a trial crop of Daniela tomatoes. He also attended the Queensland field day in 1998 attended by Mercuri where Daniela tomato plants were viewed and was given a copy of the Lefroy Valley brochure. 31 At a meeting on 4 June 1998 at Mercuri's property, Mr Rossignuolo entered into an agreement with Bell Regal for the purchase of 160,000 Daniela tomato seeds. These seeds were germinated at Barooga Nurseries and planted on 10 October 1998, 20 November 1998 and between 10-15 December 1998. In early February 1999 signs of wilting were noted and the samples taken for testing on 28 February 1999 tested positive for bacterial canker. Rossignuolo suffered significant financial loss as a result of the failure of its Daniela tomato crop. (e) de Palma 32 In 1997 Mr and Ms de Palma decided to plant a trial crop of nine acres of Daniela tomatoes after a conversation with a representative of Mercuri. This conversation followed Mr Mercuri's visit to Queensland to view crops of Daniela tomatoes. The de Palmas did not experience any problems with bacterial canker in relation to their trial crop. The de Palmas switched to Daniela tomatoes after Mr de Palma attended the field day in Queensland in May 1998 with Mr Mercuri and Mr Rossignuolo at which he inspected Daniela tomato plants. He also went to view Daniela tomatoes growing in Bundaberg, Queensland. A representative of Lefroy Valley provided Mr de Palma with a copy of the Lefroy Valley brochure. The de Palmas purchased 160,000 Daniela tomato seeds from Bell Regal in June 1998. These seeds were delivered to Barooga Nurseries where they were germinated prior to planting in October to December 1998. In early January 1999 unusual signs of wilting were noted in the de Palmas' Daniela tomatoes. Plant samples taken on 28 February 1999 tested positive for bacterial canker. The de Palmas suffered significant financial loss as a result of the failure of their Daniela tomato crop. (f) Eren 33 In 1997 Eren switched from growing "ground tomatoes" to using the "gourmet/trellis" Daniela tomato after a representative of Eren visited properties in Queensland which were growing Daniela tomatoes. The decision was then made to trial the Daniela seeds. In the 1997-1998 season the trial was undertaken with 400 plants, and there were no problems involving bacterial canker. Representatives of Eren received a copy of the Lefroy Valley brochure in late 1997. After the trial was undertaken, another representative of Eren travelled to Bundaberg in Queensland to further observe commercial crops of Daniela tomatoes. The decision was then made to acquire Daniela seeds, and on 22 May 1998 Eren entered into an agreement to purchase 152,000 Daniela seeds from Barooga Nurseries. The plantings of the Daniela seedlings took place between 17-18 October and 20-21 November 1998. 34 In January 1999 the first signs of unusual wilting were noticed and samples were taken for testing on 28 February 1999. These samples tested positive for infection by bacterial canker. Samples of water from the water supply were also taken and tested negative for signs of bacterial canker. Eren suffered significant financial loss as a result of the failure of its Daniela tomato crop. (g) Birch 35 On about 23 January 1999 Ms Gloria Birch rang the owner of Virginia Nursery Pty Ltd intending to place an order for some 600 "Tallis" tomato seedlings. However, the nursery owner did not have any of these seedlings in stock and informed Ms Birch that he had some "Red Bluff" and some Daniela seeds in stock. Ms Birch left it up to him to supply her with 600 seedlings of either variety. These seeds were required to fully stock their hydroponic shed which already had approximately 1,900 "Lana" tomato seedlings growing. On 25 January 1999 the seedlings were delivered, containing 375 Daniela seeds, and 250 Red Bluff tomatoes. The seeds were grown hydroponically, that is they were not grown in the soil but were grown through a liquid system known as "soilless culture". On about 4 February 1999 it was first noticed that the younger plants, namely the Daniela seedlings, had commenced to wilt, and this started spreading. On 17 February 1999 it was found that the crop was likely to be infected with bacterial canker, which was later confirmed by subsequent testing. The Birchs suffered financial loss as a result of the failure of its Daniela tomato crop. (h) Banks 36 Banks, which is from Bundaberg Queensland, decided in late 1998 to grow a commercial crop of tomatoes for the 1999 season, after not growing a commercial crop in the previous season. After visiting a number of properties growing commercial crops of tomatoes, including properties in Bundaberg, Banks decided to grow a commercial crop of gourmet tomatoes using tomatoes manufactured by Rijk Zwaan. However, in late 1998 the director of Banks, Mr Lindsay Banks, held discussions with Mr Paul Meibusch from Gumrange, who spoke highly of the Daniela tomatoes, and produced the Lefroy Valley brochure describing the Daniela seeds. In February 1999 Mr Banks heard about the outbreak of bacterial canker affecting tomatoes in Victoria, and discussed the problem with Mr Meibusch, who informed him it was a problem confined to Victoria, as the canker was in the Victorian growers' soil. In the Autumn 1999 growing season, Banks decided to switch seeds to include the Daniela seeds. In July 1999 it purchased 70,000 Daniela seeds. The seeds were planted in August to September 1999. Around 11 November 1999 wilting, which proved to be a result of bacterial canker, was first noticed. Banks suffered financial loss as a result of the failure of its Daniela tomato crop. Bacterial canker 37 At the outset it is necessary to consider the limited evidence adduced at this early stage of the proceeding in relation to bacterial canker. Although bacterial canker constitutes a serious risk to a tomato crop it appears that, save for Banks, none of the other applicants had any knowledge of bacterial canker until they experienced the canker in their respective Daniela tomato crops. The evidence is that although the applicants had been involved in commercial tomato growing in Australia over a long period (25 years for Costa Vraca, 35 years for Mercuri, 25 years for Tanrikulu, around 22 years for Rossignuolo, 25 years for the de Palmas, 18 years for Eren, 6 years for the Birchs, 19 years for Banks) none of them had had any prior experience concerning the infection. 38 The Lefroy Valley newsletter "Tomato Talk" published in February 1999, included an article "Bacterial Canker Rears it's Ugly Head" which stated: "In recent weeks a number of Bacterial Canker outbreaks (Clavibacter michiganesis) have been found in Victoria and southern New South Wales. These outbreaks have been reported in both processing and fresh market crops. The following information is to provide growers with an insight to the dangers of this potentially devastating disease, and to outline the checks and measures in place with all Hazera seed we supply. Hazera have long been aware of the danger of Bacterial Canker and have for a number of years been developing a strategy to ensure seed of all their varieties are tested and found free of the disease. All indeterminate varieties are produced in insect proof greenhouses with the average size being Ľ acre which constitutes a seed lot. Seed lots are not mixed. Seed is produced within Israel under strict supervision. A government agronomist field inspects every seed crop twice during the growing period, specifically to ensure a range of bacteria diseases are not present. Every seed lot exported to Australia has an additional declaration on the phytosanitary certificate stating this inspection. Each lot is harvested, left to ferment in it's [sic] own pulp prior to extraction, sterilized and dried and then sent to an independent laboratory for a health certificate on 4 bacterium; 1. Pseudomonas tomato (speck). 2. Pseudomonas corrugata (pith necrosis). 3. Xanthomonas campestris pv vesiatria (spot). 4. Corynebacterium michiganese (canker). The Hazera laboratory performs purity and germination tests and after all tests are completed to standards, the seed is then stored prior to filmcoating with fungicides and packaging. Copies of the independent health certificates are available with each lot. Also available on request is a copy of a letter from the Plant Protection and Inspection Services, STATE OF ISRAEL, which states that in the last five years that there were no positive findings of Bacterial Cannker in Hazera tomato seed production." 39 Under the headings "Symptoms", "Disease Cycle" and "Control" the newsletter stated: "Bacterial canker is an infectious disease of fresh-market and processing tomatoes that usually results in reduced yields and premature fruit ripening. The white blisters, which occur on infected tomatoes, reduce the fresh-market value of the fruit. Bacterial canker can spread rapidly through a crop and can cause near total loss. SYMPTOMS Symptoms of Bacterial Canker occur on all above ground plant parts, but the first symptoms usually appear on older leaves. The margins of infected leaves appear brown and scorched, they are curled upward and inward. Borders between the brown and green areas of the leaves are distinct. They are often separated by a thin line of yellow tissue. In the advanced stages of infection, these symptoms occur on all leaflets of an infected leaf and are unmistakable to the experienced observer. Early recognition of leaf symptoms can save valuable time in the diagnostic process. Light streaks usually develop on infected stems and shoots. These streaks grow progressively darker and eventually split, former [sic] a shallow canker. Vascular tissue of infected plant stems is discoloured, usually yellow or tan. Interference with water transport, which is caused by the cankers, results in wilting of all or part of the plant. Bacterial Canker is most easily recognised by the appearance of 'Bird's Eye' spots, which are lesions with raised brown centres, surrounded by white halo's. (1.55mm-3mm in diameter) on green or red fruit (Figure 1). In the field, leaf symptoms should make the observer suspicious of canker; however, the appearance of white blisters on the fruit confirm the suspicion. DISEASE CYCLE Bacterial canker is introduced into previously uninfested areas by infected seeds, transplants, machinery, equipment, used stakes, wire and people. Once established in the field, the bacteria may survive on infested plant residue for up to three years. Materials used in the process of raising seedlings and plants (wooden flats, benches, and stakes) may harbour the bacteria from one season to the next; and also, the bacterial canker pathogen has been found to survive the winter in weed hosts. The pathogen is spread within the field by soil, rain or sprinkler irrigation. Bacteria ooze from cankers in wet or humid weather; then when the rain splashes on cankers, it spreads the bacteria to other plants. Mechanical cultivation and hand harvesting, pruning and tying can also spread the bacteria (this is especially important of fresh-market crops). CONTROL Prevention is the only acceptable strategy for control of bacterial canker; therefore, use of disease-free seeds and disease-free transplants is the crucial control measure. Once bacterial canker becomes established, repeated application of copper compounds such as Liquicop may reduce the rate of disease spread but should not be considered a reliable control measure. Fresh-market tomato growers should rogue and/or isolate plants with symptoms of bacterial canker. Infested fields should be rotated out of tomatoes for at least three years. Additionally production materials should be disinfected. Sporekill at 1500 ppm can be used for this purpose. Weeds related to tomatoes (nightshade) should be controlled, these weeds may host the bacteria." 40 Under the heading of "Protect Yourselves Against Bacterial Canker" the Newsletter stated: · "Ensure seed is tested and the plants that produced the seed were inspected, and found free of Bacterial Canker. If an inspection has been carried out the Seed Company should be able to provide the relevant documentation including seed test results. · When pruning never use a knife or clippers. If an infected plant is pruned in this way, the vascular section is cut and infected sap is then spread throughout the crop. · Do not replant into land that has had any infection of Canker for at least 3 years. · Disinfect all stakes, wire, machinery and other production related materials prior to reuse as these can harbor [sic] disease from the previous season. Sporekill at a concentration of 1500ppm can be used for disinfecting, as can Formalin. · Incorporate Liquicop in your spray program. · Ensure you and your nursery has hygiene procedures in place to guard against infection. · Ensure that weeds related to tomatoes such as nightshade, which may host bacteria are eradicated." 41 Dr Peter Taylor, an agricultural consultant engaged by Costa Vraca to take samples of fruit, stems, foliage, water and soil, stated that the most important and most common source of bacterial canker infection is through infected seed and as few as one infected seed in 10,000 has been estimated as enough to result in an epidemic in the field. 42 A threshold question is whether the applicants have a prima facie case that the source of the bacterial canker complained of by the applicants was the Daniela seed, rather than external sources, such as the soil in which the crops were grown. Quality control requirements in Israel required tests to be carried out to ensure that the seed was not infected by bacterial canker. The Phytosanitary certificates of the State of Israel provided by the Hazera respondents in respect of their tomato seed exports to Australia stated the seeds were inspected according to "appropriate procedures" and were "considered to conform with the current phytosanitary regulations of the importing country". The certificates contained an "Additional declaration" that: "Tomato: The fields were inspected during active growth and found free from bacterial canker" 43 Although the Hazera respondents and Lefroy Valley claimed after the outbreak that the tests they and others carried out eliminated the Daniela seeds as a source of the infection, the Hazera respondents did not adduce direct evidence at the present hearing as to the tests they actually carried out, or caused to be carried out, to ensure that the seeds were disease free. 44 The evidence relied upon by the applicants to establish that some Daniela seeds acquired by them in the Hazera respondents' sealed packages were infected by bacterial canker is as follows. 1. Some of the unopened Hazera respondents' packages carrying the same batch number as the Daniela seed from which Costa Vraca germinated its seedlings tested positive to the canker. Tests conducted in the United States of America on those seeds showed that, although forty thousand seeds sent to STA Laboratories tested negative, of the thirty thousand seeds sent to Agdia Inc for testing, two composite samples of 50 Daniela R-144 (Batch No. 3781170-60) tomato seeds tested positive to bacterial canker. The evidence is to the effect that there were deficiencies in the tests carried out by STA Laboratories and that the tests carried out by Agdia Inc were more reliable. 2. None of the applicants had any experience of bacterial canker at any of their farms prior to the outbreak of canker in the Daniela tomatoes grown from the Hazera respondents' Daniela seeds. Bacterial canker was not found in capsicums and other vegetables, such as eggplants, which grew alongside the infected tomato crops. Further, some Daniela seedlings of Costa Vraca which had been given to and grown by "backyard growers" also tested positive to the canker. Daniela seedlings grown in glasshouse conditions by Birch Hydroponics tested positive to bacterial canker, notwithstanding that they had not been grown in the ground. Bacterial canker was confirmed in a number of properties growing Daniela tomatoes in a large area and up to 200 kilometres apart. Further, the canker was experienced by Banks in Queensland. The above matters tend to exclude external causes as the source of the canker. 3. A Department of Natural Resources and Environment report found that although the bacterial canker spread to twelve out of the fourteen varieties of tomatoes surveyed, Daniela tomatoes had a significantly greater proportion of blocks that were diagnosed as positive. 4. The exclusion of external sources is supported by the laboratory tests conducted by Crop Health Services on field, water and plant samples provided by Costa Vraca. The results of the tests were that: (a) water from the irrigation systems proved to be negative; (b) Daniela tomato foliage and fruit samples taken proved to be positive to bacterial canker; (c) soil taken from the properties of the applicants proved to be negative. 5. Bacterial canker is predominantly a seed-borne disease. 45 The applicants' evidence justifies the inference for the purposes of the prima facie case requirements of O 8 r 2(2) that Daniela seeds in the Hazera respondents' sealed packages sold by Lefroy Valley to the applicants were the most likely source of the bacterial canker experienced by the applicants. The Hazera respondents' quality representations 46 All of the applicants (except for the Birchs) allege that the Hazera respondents made representations and warranties in relation to the Daniela seeds that were misleading or deceptive in contravention of s 52 of the TPA and constituted false representations that the tomato seeds were of a particular standard, quality or grade in contravention of s 53(a) of the TPA. The Birchs alleges that the supply of the Daniela seed without warning of the risk of bacterial canker in circumstances where the Hazera respondents knew or ought to have known of the risk, constitutes a breach of s 52 of the TPA. 47 Substantial reliance was placed by the applicants on the Hazera respondents' quality representations. The representations related essentially to the high yield of the Daniela seed and the excellent quality and long shelf life of tomatoes grown from the Daniela seed, rather than whether all of the seeds were free of disease or infection. The difficulty confronting the applicants concerning the representations is that the quality of the tomatoes that could be grown from uninfected Daniela seed was substantially as represented. The evidence of the applicants who grew trial crops of Daniela tomatoes, which were unaffected by bacterial canker, was that the tomatoes grown produced "excellent yields" and obtained the "highest prices at market". In substance, the Hazera catalogue and the Lefroy Valley Brochure do not misrepresent the quality of the tomatoes that can be grown from the Daniela seed. Further, it appears that the bacterial canker in the Daniela tomato crop resulted from only some of the Daniela seeds being infected by bacterial canker. 48 In the circumstances, I am not satisfied that a prima facie case of misrepresentation has been made out in relation to the representations as to the quality of the tomatoes that can be grown from the Daniela seed. The control system representations and s 52 of the TPA 49 The control system representations raise different issues. A specific representation as to the Hazera respondents' state-of-the-art quality control systems was published in the Hazera catalogue but was only read by representatives of Costa Vraca and Mercuri. Further, there is little evidence as to the quality control systems employed by the Hazera respondents. The issues raised by the evidence relate to whether: · any representations made by the Hazera respondents in Australia in relation to their quality control procedures regarding the Daniela seeds were misleading or deceptive; · the Hazera respondents breached any duty of care owed to the applicants in respect of their quality control procedures regarding the Daniela seeds. 50 I turn first to consider whether a prima facie case of contravention of s 52 of the TPA has been made out. As I explained at 11-14 in Hoffman-La Roche, subject to s 5 of the TPA, the provisions of, inter alia, Pt IV and Pt V of the TPA do not have extra-territorial operation. Accordingly, unless the Hazera respondents carried on business in Australia (or were incorporated in Australia) they could only contravene or be involved in a contravention of s 52 of the TPA by reason of conduct engaged in by those respondents in Australia. While there may be an issue as to whether the supply by the Hazera respondents of products to their exclusive distributor in Australia amounts to those respondents carrying on business in Australia, I prefer to decide the TPA issues arising on the present applications on the basis of the conduct engaged in by the Hazera respondents in Australia. That conduct includes the supply of the Daniela seeds in sealed packages to their exclusive distributor in Australia (by air freighting the seeds to Lefroy Valley's freight forwarding agent in Australia) and representations, statements and communications made by the Hazera respondents outside of Australia which were directed to, or intended to be acted upon, by persons within Australia: see Hoffman La-Roche at 40. 51 Statements made by the Hazera respondents on the sealed packages containing the Daniela seeds can, properly, be regarded as statements made by them in Australia. Any statement made by the Hazera respondents on its sealed package, is a statement intended by it to be made to the users of the seeds, with the consequence that when the package is sent by the Hazera respondents to Australia for use in Australia, the statement on the package can be taken to be a statement made by the Hazera respondents in Australia, and is therefore conduct in Australia. I am also prepared to infer that statements made in the Lefroy Valley brochure concerning the Hazera respondents' technical knowledge in respect of the Daniela seeds, while made by a company in the Lefroy Valley group, were based upon and reflected information provided by the Hazera respondents which was directed by those respondents to, and was intended by those respondents to be acted upon and republished by, Lefroy Valley in Australia. 52 I find, on a prima facie basis, that the statements on the sealed packages by the Hazera respondents that the Daniela seeds had been "Tested" and "Germ Tested" constitute representations by the Hazera respondents that the seeds are safe for use, in the sense that they are free from any significant disease or infection producing organisms. The factual matrix upon which that finding is based includes the following matters: · the regulatory requirements in relation to Phytosanitary certificates for the importation of tomato seeds into Australia; · an awareness in the seed producing industry of the necessity of ensuring that the seeds produced for supply to growers are free of disease and infection; · the Hazera respondents' international repute and its "tremendous depth in technical knowledge for tomato production" would be likely to lead purchasers of its products to conclude that its testing procedures were such that only products that were safe for use, at least in the sense of being free from any significant diseases or infections, would be packed in its sealed packages for use by consumers; · purchasers of the Hazera respondents' seeds in sealed packages are totally reliant on the Hazera respondents to ensure that the seeds have been produced and tested as safe for use, at least in the sense described above; · the statement that the seeds have been "Tested" and "Germ Tested" would be taken to mean that the tests revealed the seeds were safe for use in the sense described above. 53 Although it is clearly arguable that the statements that the seeds have been "Tested" and "Germ Tested" does not necessarily mean that no seed is carrying a disease or is infected, I am prepared to infer that sealed package and the statements made concerning testing would be taken by tomato growers to mean that the seeds contained in the package are safe for use in the sense described above. In particular, the statement that the seeds have been "Germ Tested" would be likely to be taken to mean that they have not tested positive for bacteria. In that regard a "germ", colloquially, would be taken to include bacteria. The Oxford English Dictionary definition of "germ" includes: "3. In early use, vaguely, the 'seed' of a disease. In mod. use, a micro-organism or microbe; often, one of the microbes which are believed to cause disease. … Other general words, such as germ, microbe, micro-organism, are often used as synonymous with bacterium, though, strictly, they include the smallest organisms of the animal kingdom." 54 Any representations that might be implied is a question of fact depending on the circumstances of the particular case. However, bearing that in mind, an analogy might be drawn between the circumstances in the present case and those that arose in Handbury v Nolan (1977) 13 ALR 339 in which Barwick CJ (at 342), Jacobs J (at 349) and Aickin J (at 350) accepted that a positive test for pregnancy meant that that indicated to potential purchasers that the cow was pregnant. Stephen J (at 344-345), with whom Gibbs J agreed (at 342), observed that pregnancy tests, while reasonably reliable, were not infallible and the fact that the cow had been pregnancy tested, and the test had produced a positive result, did not mean that the cow was in fact pregnant and sold as such. The converse may be said to apply here. The implicit statement that the seeds had tested negative would be likely to be accepted by tomato growers as meaning that the seeds were safe for use as they were not infected by any significant diseases or infections. 55 As I have concluded that some of the Daniela seeds supplied in the sealed packages were not safe for use as they were infected by bacterial canker, a significant infection, the implied representation by the Hazera respondents to the contrary was misleading. I am also prepared to infer from the evidence adduced at this stage that the applicants acted upon the basis that the Hazera respondents' quality control and testing systems ensured that the seeds supplied by the Hazera respondents were safe for use in the sense described above. Accordingly, I am satisfied that the applicants have a prima facie case for damages by reason of the misleading conduct of the Hazera respondents in contravention of s 52 of the TPA. 56 It may also be arguable that the Hazera respondents engaged in misleading or negligent conduct by supplying seeds in sealed packages without warning the applicants of the risk that the tests they used could not be relied upon to ensure that the seeds were free from significant disease or infection. Recent failure to warn cases demonstrate how difficult the determination of that question can be, see for example: Costa Vraca Pty Ltd v Berrigan Weed & Pest Control Pty Ltd (1998) 155 ALR 714 at 723; Dovuro Pty Ltd v Wilkins (2000) 105 FCR 476 at 539; Graham Barclay Oysters Pty Ltd v Ryan [2002] HCA 54 ("Graham Barclay") at [45], [112], [201] and [256] and Woods v Multi-Sport Holdings Pty Ltd (2002) 186 ALR 145 at 152-153, 161-162 and 174-176. As I have found a prima facie case has been made out in respect of the representation that the seeds were safe for use I need not further pursue this aspect of the matter. Negligence 57 Lord Atkin in Donoghue v Stevenson [1932] AC 562 at 599 stated: "…a manufacturer of products, which he sells in such a form as to show that he intends them to reach the ultimate consumer in the form in which they left him with no reasonable possibility of intermediate examination, and with the knowledge that the absence of reasonable care in the preparation or putting up of the products will result in an injury to the consumer's life or property, owes a duty to the consumer to take that reasonable care." 58 In Graham Barclay at [106] McHugh J observed: "The duty of care owed by a manufacturer or producer to a consumer is a duty to take reasonable care to avoid injury to the consumer. To formulate the duty in more specific terms invites error because it is likely to mix a question of law (whether a duty existed) with a question of fact (whether a breach occurred)." 59 In The Council of the Shire of Wyong v Shirt (1980) 146 CLR 40 ("Wyong") at 47-48 Mason J stated: "In deciding whether there has been a breach of the duty of care the tribunal of fact must first ask itself whether a reasonable man in the defendant's position would have foreseen that his conduct involved a risk of injury to the plaintiff or to a class of persons including the plaintiff. If the answer be in the affirmative, it is then for the tribunal of fact to determine what a reasonable man would do by way of response to the risk. The perception of the reasonable man's response calls for a consideration of the magnitude of the risk and the degree of the probability of its occurrence, along with the expense, difficulty and inconvenience of taking alleviating action and any other conflicting responsibilities which the defendant may have. It is only when these matters are balanced out that the tribunal of fact can confidently assert what is the standard of response to be ascribed to the reasonable man placed in the defendant's position. The considerations to which I have referred indicate that a risk of injury which is remote in the sense that it is extremely unlikely to occur may nevertheless constitute a foreseeable risk. A risk which is not far-fetched or fanciful is real and therefore foreseeable. But, as we have seen, the existence of a foreseeable risk of injury does not in itself dispose of the question of breach of duty. The magnitude of the risk and its degree of probability remain to be considered with other relevant factors." 60 For a recent application of Wyong see Graham Barclay per Gummow and Hayne JJ at [190]-[203], and Gleeson CJ at [55] 61 Applying the principles set out in Wyong at this interlocutory stage is a matter of some difficulty. Nonetheless, there are a number of matters established by the evidence from which inferences may be drawn to the effect that the quality control procedures employed by the Hazera respondents in respect of the Daniela seeds were deficient, were not a reasonable response to the risk posed by bacterial canker and constituted a breach of a duty of care owed by the Hazera respondents to tomato growers acquiring Daniela seeds. Those matters may be summarised as follows. 1. The Lefroy Valley brochure stated that all of the Hazera respondents' tomato varieties "will be available in original packaging". The Daniela seeds were delivered by the Hazera respondents to their exclusive distributor in Australia in sealed packages with the intention and expectation that they would be on-sold by the exclusive distributor to the end consumer in the unopened package. The sealed package contained statements, inter alia, that the seeds were part of a Lot number that had been "Tested" on a particular date and also that the seeds had also been "Germ Tested" on a different date. Other statements were made on the sealed package but they were not able to be identified by me from the exhibit tendered in evidence. As explained above, tomato growers would be expected to take the testing details to mean the seeds were safe for use in the sense described earlier in these reasons. 2. The Hazera respondents advertised themselves as a leading international seed company with state-of-the-art quality control systems. The Australian distributor of the Hazera respondents stated in the Lefroy Valley brochure that the Hazera respondents "have a tremendous depth in technical knowledge for tomato production that is available to growers around the world" and that the distributor will be "a keen facilitator in this process". I infer that those representations were based upon information provided by the Hazera respondents and were published with their authorisation. In particular, Bell Regal can be taken to be stating that it will facilitate the passing on to growers of the "tremendous depth in technical knowledge" of the Hazera respondents. Thus, tomato growers acquiring the Daniela seed were entitled to expect to be informed by the Hazera respondents directly, or through Lefroy Valley, of any significant technical information that was relevant to their production of Daniela tomatoes. Significant technical information would include information concerning any need to test Daniela seeds or seedlings for any serious disease or infection where that risk is not farfetched or fanciful. The information would also include information that the Hazera respondents knew or ought to have known concerning any real, and therefore foreseeable, risk that some of the seeds might be infected by bacterial canker. 3. The actual testing conducted on the seed lots acquired by the applicants is unclear. The evidence is that those seed lots were exported by the Hazera respondents to their exclusive distributor in Australia with a Phytosanitary certificate which certified that the seeds had been inspected according to appropriate procedures, were considered to be free from quarantine pests, practically free from other injurious pests; and were considered to conform with the current phytosanitary regulations of the importing country. The certificate also contained the additional declaration that the field in which the tomato seeds were grown was "inspected during active growth and found free from bacterial canker". In his affidavit Amit Schwarz, the marketing manager of one of the Hazera respondents, outlined the processes followed for regulatory approval for the export of tomato seeds from Israel. In explaining the Phytosanitary certificate Mr Schwarz stated that the additional declaration concerning bacterial canker is required in respect of tomato seeds exported to Australia and is based upon the inspections carried out at the relevant fields by the Plant Protection and Inspection Services ("PPIS"), an division of the Israeli Ministry of Agriculture and Rural Development. Mr Schwarz stated that, notwithstanding that that is the only specific declaration Australia requires, the Hazera respondents: "[have] all seed lots specifically tested for the presence of a number of diseases, including [bacterial canker], by an external laboratory recognised by the PPIS and in accordance with the protocol approved by the PPIS." 4. Mr Shwarz did not give any detail of the actual tests conducted in respect of the seed lots the subject of the present proceeding. 5. The initial response of Lefroy Valley to the outbreak of bacterial canker in Australia was to deny that the Daniela seed was the source of the infection. In an open letter to all tomato growers it stated: "Hazera are a major international supplier of Tomato Seed and are very aware of the implications of this problem, and as a consequence has the most stringent quality control procedures in the world." The open letter sets out the tests that were alleged to have been conducted in respect of the Daniela seeds and the Daniela seed crop, stating that the Department of Agriculture in Israel confirmed that in the last five years there were no plants which "under our interpretation were affected by bacteria CMM, which causes canker" and that the seed crop, after going through a fermentation process and acid treatment against all bacterial disease, is then tested for the four major bacteria (which included bacterial canker) by an independent laboratory in Israel. The letter also stated that, after the outbreaks in Victoria, the Hazera respondents resubmitted all current seed lots for retesting for bacteria and "All lots tested negative". The letter went on to say that: "As a double check seed samples were supplied to DNRE Knoxfield who forwarded a sample in original packing to S.T.A. Laboratories in the USA where it was tested and found to be negative." However, as I shall shortly explain, the testing procedures employed by the Hazera respondents, both in relation to their initial testing prior to exporting the Daniela seeds, the subject of the present litigation, and after the outbreak of bacterial canker at the tomato growing farms of the applicants, appear to have been inadequate. 6. Bacterial canker was recognised by the Hazera respondents to be an extremely serious infection which can cause great harm to the crops of growers who acquire infected seeds. The nature of the risk involved was said to be such that as few as one infected seed in 10,000 can result in an epidemic in the field. It was also acknowledged by Lefroy Valley (presumably acting on expert advice) that use of disease-free seeds and disease-free transplants is the crucial control measure as "[p]revention is the only acceptable strategy for control of bacterial canker". Notwithstanding the serious hazard presented by seeds infected by bacterial canker, the problem presented by bacterial canker was relatively unknown by experienced tomato growers in Australia. In that regard, none of the applicants, who were all experienced tomato growers, had ever experienced bacterial canker in respect of any crop grown by them. Accordingly, they were entirely reliant on the Hazera respondents to supply disease-free seeds. 7. Problems had been experienced in relation to the validity and reliability of tests conducted on seeds for bacterial canker. In explaining why the seeds sent to the STA Laboratories in the USA for testing tested negative, but some seeds sent to Agdia Inc for testing in the USA tested positive to bacterial canker, Dr Peter Taylor informed some of the applicants that: "the testing procedure adopted by Agdia Inc was to be preferred as it more closely mimics the real life situation in that Agdia Inc divided the sample into small batches of about 50 seeds, germinated them, and then performed an Enzyme Linted Immuno Sorbent Assay (ELISA) tests to detect clavibacter michiganesis on the young seedlings." 8. There appears to have been some recognition in the seed industry that the existing testing procedures were inadequate to ascertain the presence of bacterial canker. The main evidence as to the inadequacy of the tests being used in the industry related to the tests which had been developed by another seed manufacturer, Novartis Seeds Pty Ltd ("Novartis"). The evidence relating to Novartis' tests was to the effect that the testing process for bacterial canker had "changed in the last couple of years after the original test, which was an immuno fluorescence test was found to not give the 100% accuracy that had been accepted for, at least, 15 years". In context "the last couple of years" appears to be a reference to the "last couple of years" prior to December 1999 when the relevant Novartis letter setting out the change in procedure, was written. As a consequence Novartis, working with a Dutch technical body, had moved away from the old testing procedure it used in 1997 to devise new testing methods in 1998 to improve the testing for the detection of bacterial canker. The tests referred to on the seed packages appear to have been conducted in June and July 1998. 9. The Hazera respondents did not adduce any evidence in response to the implicit, if not explicit, criticisms of the testing procedures employed by them, nor did they adduce any evidence as to their state of awareness of deficiencies in their testing procedures or of the testing procedures employed by Agdia or Novartis. Although the procedures used by Novartis and Agdia may fall short of a guarantee of disease-free seeds, I am prepared to infer from the evidence adduced at this stage that there were deficiencies in the testing employed by the Hazera respondents and, having regard to the nature and extent of the bacterial canker experienced by the applicants, the deficiencies were significant. For reasons similar to those I gave at 35-37 in Hoffman-La Roche I regard the failure of the Hazera respondents to adduce evidence in response to the applicants' evidence in respect of the state-of-the-art testing procedures available regarding the tomato seeds, as entitling me to more confidently and readily draw that inference. The inference is drawn on the basis of the evidence to which I have referred and not on the res ipsa loquitur basis urged by the applicants: cf Schellenberg v Tunnel Holdings Pty Limited (2000) 200 CLR 121 at 140. 62 Having regard to the principles set out in John Deere the matters set out above justify the following inferences on the basis of the principles stated by Mason J in Wyong, that: · a reasonable seed producer in the position of the Hazera respondents would have foreseen that the inadequacies in their testing procedures involved a risk of serious harm to the crops of tomato growers acquiring the Daniela seeds; · a reasonable seed producer's response to the risk would be to improve the testing procedures, as Novartis did, or to warn tomato growers of the need to conduct appropriate tests to eliminate or reduce the risk of bacterial canker in their tomato crops; · the Hazera respondents did not take steps to improve their testing procedures or to warn tomato growers of the need to conduct appropriate tests to eliminate or reduce the risk; · there is no evidence that the adoption of improved testing procedures or the giving of a warning to tomato growers would be, in the circumstances, unreasonable or unrealistic: cf Graham Barclay per Gummow and Hayne JJ at [201]. 63 Accordingly, although I recognise the difficulty of making the above findings on the extremely limited evidence before me, I am satisfied that the applicants also have a prima facie case in negligence against the Hazera respondents. Order 8 rule 2(2) - Conclusions 64 For the reasons set out above, I am satisfied that the applicants have a prima facie case for damages in respect of the conduct of the Hazera respondents in contravention of s 52 of the TPA and also in negligence. As I have found a prima facie case in negligence and under s 52 it is unnecessary for me to consider the other claims made against the Hazera respondents. The Court has jurisdiction in respect of the contravention of s 52 under s 86(1) of the TPA. There is a sufficient overlap in the factual issues involved in the s 52 and the negligence claims for those claims to form part of the "matter" before the Court: see Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (2000) 104 FCR 564 at 599. Accordingly, the negligence claim is part of the "matter" raised by the s 52 claim and is therefore within the accrued jurisdiction of the Court. 65 The final requirement under O 8 r 2(2) is the requirement in sub-rule (b) that r 1 applies to the proceeding. It is clear that the proceeding is founded on a cause of action arising in the Commonwealth, being the contravention of s 52 of the TPA, with the consequence that O 8 r 1(1)(a) applies. Insofar as the negligence claim is based on tortious acts or omissions committed outside the Commonwealth O 8 r 1(1)(ad) applies as the proceeding is for the recovery of damage suffered in the Commonwealth caused by a tortious act or omission, wherever occurring. Accordingly, I am satisfied that the requirements of O 8 r 2(2) have been met. 66 The prima facie case that I have found has been made out on the evidence, is not one which strictly conforms to the cases pleaded by the applicants. In the circumstances it is appropriate to grant the applicants leave to amend their pleadings. The amendments should also take into account the criticisms of the pleadings made by the Hazera respondents. Inappropriate forum 67 The Hazera respondents final contention is that the Federal Court is a clearly inappropriate forum for the determination of the dispute between the parties and that the applicants' proceedings against them should be stayed: see Henry v Henry (1996) 185 CLR 571 at 587. The contention is primarily based upon the claim of the Hazera respondents that, if the proceedings are contested in Australia, they will be unable to bring a cross-claim in respect of the tests carried out by the PPIS, which is an agency in the State of Israel. In that regard reliance is placed by the Hazera respondents on s 9 of the Foreign States Immunity Act 1985 (Cth) ("the Immunities Act") which provides that, except as provided by the Immunities Act, a foreign state is immune from the jurisdiction of the Courts of Australia in a proceeding. 68 There are a number of problems with this contention. First, it is hypothetical at this stage as to whether the Hazera respondents have, or will bring, any claim against the PPIS or the State of Israel. While the PPIS appear to have carried out certain inspections and issued certain declarations, it is far from clear that any of the deficiencies in the testing procedures that I have adverted to earlier in these reasons are deficiencies in the testing procedures of the PPIS, rather than deficiencies in the testing procedures of the Hazera respondents or other bodies it engaged to conduct tests. 69 Second, s 11(1) of the Immunities Act provides that the immunity does not apply insofar as the proceeding concerns "a commercial transaction". Section 11(3) defines a commercial transaction as meaning a commercial, trading, business, professional, industrial or like transaction to which the foreign state has entered or a like activity in which the state has engaged, and includes a contract for the supply of services. There is little detail concerning the precise role played by the PPIS in relation to the inspection and testing services it provides. At this stage, the evidence does not enable me to exclude the possibility that those services fall within the definition of a "commercial transaction" for the purposes of the Immunities Act. Further, s 13 of the Immunities Act provides that the immunity does not apply insofar as the proceeding concerns loss of or damage to tangible property caused by an act or omission done or omitted to be done in Australia. There may be some difficulties in ascertaining that s 13 applies to the facts of the present case. However, the paucity of the evidence presently before the Court is such that I am not able to exclude the possibility that the immunity may also be lost under s 13. In the circumstances, the Hazera respondents' contention cannot be put higher than that there is a real risk of disadvantage to them if they litigate a third party proceeding against an agency of a State of Israel in Australia. 70 However, there are other and more fundamental reasons for concluding that the Federal Court is not a clearly inappropriate forum for the determination of the present proceedings. All applicants are located in Australia and suffered the loss and damage they claimed in Australia as a result of a contract for the supply of goods entered into by them in Australia. As causation and loss and damage are likely to be substantial issues between the parties it will follow that most of the witnesses and bulk of the evidence to be given will be required to be given by witnesses resident in Australia. Further, Australian law applies to the causes of action of the applicants who are also bringing associated claims against Bell Regal and Coralberry, which are Australian corporations. 71 I am satisfied that Australia is a clearly appropriate, rather than a clearly inappropriate, forum. I would add that it is far from clear that the applicants would be entitled to proceed against the respondents in Israel on all of the causes of action pleaded against them. In the result I am not satisfied that any disadvantage the Hazera respondents might suffer is such that it could be said to be in the interests of all the parties or the ends of justice to stay the present proceeding as sought for by the Hazera respondents. Security for costs 72 Bell Regal and Coralberry have applied for security for costs from Costa Vraca, Mercuri and Tanrikulu. Bell Regal alone brought a motion against Eren, and Gumrange and Coralberry have applied for security for costs from Banks. For ease of reference I will refer to the applicants for security for costs as the Australian respondents. 73 The Australian respondents relied upon s 56 of the Federal Court of Australia Act 1976 (Cth) ("FCA Act"), s 1335(1) of the Corporations Act 2001 (Cth) ("Corporations Act") and O 28 r 3(1)(b) of the Rules. 74 Under s 56 of the FCA Act the Court may order that an applicant in a proceeding give security for the payment of costs that may be awarded against the applicant. Section 1335(1) of the Corporations Act provides: "Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given." 75 Order 28 r 3(1)(b) of the Rules provides that where an applicant is not suing for his or her own benefit, but for the benefit of someone else, and there is reason to believe the applicant will be unable to pay the respondent's costs in the event of an order to do so, the Court may order the applicant give security for costs. The Australian respondents, who relied primarily on s 1335(1) of the Corporations Act, have only sought security against the corporate applicants. In Beach Petroleum NL v Johnson (1992) 10 ACLC 525 at 527 von Doussa J stated: "In my opinion the power of the Court under s. 1335 arises if credible evidence establishes that there is reason to believe there is a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay the costs of the defendant on service of the allocatur, if judgment goes against it. This will be so even if in other events which can also be described as reasonably possible the plaintiff corporation would be able to pay the costs. The degree of likelihood of the plaintiff corporation being unable to pay the costs along with all the circumstances, actual and possible, about its financial position, would be then to be taken into account in the exercise of its discretion, and in framing the orders of the Court if the decision is to order security." 76 The Australian respondents appeared to accept that, as a matter of practical reality, they had to satisfy the threshold laid down by s 1335(1): cf MHG Plastic Industries Pty Ltd v Quality Assurance Services Pty Limited [2002] FCA 821 at [9]-[10]. 77 The principles to be applied in a security for costs application are well established. An order for security is discretionary and in exercising its discretion the Court needs to weigh up the competing interests of the parties in the context of all the circumstances of the case. However, where shareholders or beneficiaries are, in substance, using and funding an impecunious, or potentially impecunious, applicant to contest litigation for their benefit, that has been treated as a ground in favour of ordering security for costs. Thus, in the absence of an undertaking by the shareholders or beneficiaries standing behind the impecunious applicant, security for costs may be ordered to ensure that those who stand to benefit undertake some of the risks: see Rosenfield Nominees Pty Ltd v Bain & Co (1988) 14 ACLR 467 per Giles J at 472-3 and Acohs Pty Ltd v Merck Ltd [1997] FCA 573 at 4-5. In such circumstances an order for security for costs might not be declined on the basis that it would frustrate the litigation unless the company establishes that those standing behind it, and who will gain from the litigation, are also impecunious: see Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 at 4, and Bryan E Fencott Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 511. An example of a person standing behind an impecunious applicant is the case of a company acting as a trustee without a right of indemnity against the trust assets in respect of the costs and expenses it incurs as trustee. In Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) ATPR 40-584 Smithers J observed at 46,731: "…an applicant being a trustee company which desires to resist an order for security for costs should establish that recourse to property held by or for it will be available to the party against whom it has brought its action and be adequate, at the appropriate time, to meet the possible liability for costs." 78 Before considering the circumstances of each of the five proceedings in which security is being sought it is appropriate to make some observations about certain features of the present litigation. The first feature is that in all of the O 8 r 2(2) applications I have found that the applicants have a prima facie case for relief for damages against the Hazera respondents. It must follow that they have established the bona fides and merits of their claims against those respondents. The claims by the corporate applicants involve substantial amounts; at least $7,650,000 is claimed by Costa Vraca, at least $4,346,000 is claimed by Mercuri, at least $1,719,000 is claimed by Tanrikulu, at least $686,972 is claimed by Eren and at least $1,071,000 is claimed by Banks. While it was unnecessary for the purposes of the O 8 r 2(2) application to consider the bona fides and merits of the claims against the Australian respondents, there is sufficient material before the Court for me to conclude that those claims are bona fide, appear to have merit and, importantly, are properly brought in the same proceeding as the claims against the Hazera respondents. 79 The second feature is that there are eight proceedings, three of which (Rossignuolo, the de Palmas and the Birchs) have been commenced by individuals and are not the subject of security for costs applications. The damages being claimed in those proceedings are damages of at least $388,299.84 for Rossignuolo, of at least $461,210.44 for the de Palmas, and in excess of $200,000 for the Birchs. The main issues being contested in the three proceedings in which security is not being sought and the five proceedings in which security is being sought will involve the same, or substantially overlapping, evidence. While the evidence will differ in relation to the damages claims I expect that common issues of principle will arise for determination in respect of those claims. Further, for reasons I will shortly set out I have declined to order security for costs in the main proceeding by Costa Vraca. Accordingly, the Australian respondents will be required to incur a large part of their costs in defending the various proceedings by the individual applicants and Costa Vraca in any event. 80 Also, as a result of the common and overlapping issues in the eight proceedings it is likely that, in the first instance, the trial will be limited to particular issues in particular cases on the basis that the parties agree to be bound by the result. In those circumstances there are real difficulties in forming a view as to the likelihood of the Australian respondents not being paid all of their costs by any particular applicant in the event that that applicant is unsuccessful. While the above matters do not preclude the Australian respondents from obtaining orders for security for costs at this stage, they complicate the question of whether security for costs should be ordered and, if so, in what amount. In particular, if security is ordered in any of the remaining four proceedings by corporate applicants there are obviously sound reasons for limiting the security at this stage to security for the additional costs that the Australian respondents will have to incur by reason of the particular proceeding. 81 Thirdly, although each of the corporate respondents has claimed that its present financial position has been detrimentally affected by the losses incurred by reason of its use of the Daniela seeds, this is not a case where an applicant's impecuniosity has been substantially caused by the respondent, which is applying for security for costs. 82 It is in the context of the above observations that I now turn to consider the merits of the particular applications for security for costs. (a) Costa Vraca 83 Costa Vraca, which is owned and conducted by members of the Vraca family, carries on its established and substantial business in its own right. Costa Vraca's accounts for the three years up to 30 June 2001 are before the Court. It is unnecessary to go into the detail of those accounts. They demonstrate that the company carries on a very substantial business. Its sales in the years 30 June 1999 to 30 June 2001 were $6,380,000, $7,040,000 and $12,750,000 respectively. Costa Vraca incurred a small loss in 1999, a small profit in the year 2000 and a profit of over $1,064,000 in 2001. Costa Vraca claims that part of the reason for the reduced profits were problems it experienced with the Daniela seeds. Significantly, Costa Vraca has net assets of $1,342,000 as at 30 June 2001. The assets of Costa Vraca are subject to charges and mortgages but that does not alter the fact that its net assets are in excess of $1,300,000. 84 Having regard to the period in which Costa Vraca has carried on its business, the substantial nature of its business and the absence of any evidence that it has defaulted, or is likely to default, in the payment of any of its debts, I am not satisfied that there is a reasonable possibility that Costa Vraca will be unable to pay its portion of the costs that may be payable to the Australian respondents if they are successful. In arriving at that conclusion I have taken into account the circumstance that it is likely that Costa Vraca's proceeding is only one of eight proceedings before the Court and it is unlikely that, in a commercial sense, it alone will be required to bear the whole, or a disproportionate share, of the burden of the liability for the Australian respondents' costs if the proceedings are unsuccessful. 85 Nevertheless, even if I was satisfied that there was a reasonable possibility that Costa Vraca would be unable to pay the costs of the Australian respondents in the event that Costa Vraca's claim is unsuccessful, I would still not have exercised my discretion to order security for costs against Costa Vraca as there is not a sufficient likelihood of Costa Vraca being unable to pay those costs to warrant an order for security to be provided. In that regard the bona fides and merits of Costa Vraca's claims are factors that weigh against the exercise of the discretion. (b) Mercuri 86 Mercuri has a paid up share capital of $3.00 and is a Mercuri family company. Since 1993 Mercuri has carried on a substantial farming business as trustee of the Mercuri Family Trust. The sales of the Trust were in excess of $3,600,000 in 2001. Although the net profit earned from year to year was modest, save in 1999 when there were losses of $1,423,412, the profit to 30 June 2001 is said to be $503,302. There are, however, deficiencies in the net trust funds and the amount of the Trust's bank debts are substantial. 87 It is unnecessary for me to consider the financial details of the Mercuri Family Trust as, notwithstanding the initial assertion of Mercuri that it had a right of indemnity against the trust assets in respect of costs and expenses it incurred as trustee, the trust deed discloses that there is no such right of indemnity. In the circumstances Mercuri is no more than a shell company and the Australian respondents have established that they have met the threshold in s 1335(1) of the Corporations Act. 88 The evidence discloses that the members of the Mercuri family, who are the main beneficiaries of the trust, do have substantial assets. I infer that they are the persons who will, in a commercial sense, be responsible for funding the Mercuri's litigation and they are the persons who are likely to benefit from it, but they have not been prepared to "come out from behind the skirts" of the Trust by agreeing to be liable for any part of Mercuri's costs: see Harpur v Ariadne Australia Limited (1984) 2 Qd R 523 at 532 and Jalpalm Pty Ltd v Hamilton Island Enterprises Pty Ltd (1995) 16 ACSR 532 at [8]. I regard these circumstances and the absence of a right of indemnity in respect of the trust assets as factors that weigh strongly in favour of the making of an order for security for costs. 89 Mercuri put forward a number of matters as weighing against security: delay; prejudice; the public interest; the merits and bona fides of its claim and certain other circumstances. I have considered all of those matters but do not regard them individually or collectively as outweighing the absence of a right of indemnity in the trust deed and of any preparedness of the beneficiaries to be liable for costs. In particular, I do not regard the arguments on delay and prejudice as having any substance in the circumstances of the present 90 litigation. An earlier security for costs application would have made little difference as it was inevitable that any substantial interlocutory steps would have to await the outcome of the service of the proceedings on the Hazera respondents. 91 It was also claimed that the order sought will stultify the litigation. I do not accept that argument with respect to the amount of security I propose to order. In any event, as there is an absence of impecuniosity on the part of those standing behind the Mercuri Family Trust, that assertion would not be a sufficient reason to decline an order for security for costs in the circumstances of the present case. 92 Members of the Mercuri family are seeking to obtain the benefit of the litigation by standing behind what is no more than a shell company. The factors which weighed against the ordering of security in Costa Vraca's case are not present here. Accordingly, I am satisfied that an appropriate order for security for costs should be made. In the first instance, only a modest amount should be ordered as it is too early in the proceedings to ascertain the amount of any additional costs that may be incurred by the Australian respondents by reason of Mercuri's proceeding. The question of any increment to that amount can be considered when the costs can be better estimated. At this stage I am only prepared to order that the sum of $20,000 or a bank guarantee for that amount, be provided as security for costs. (c) Tanrikulu 93 Tanrikulu has been conducting its farming business since 1994 as trustee of the Tanrikulu Family Trust, the beneficiaries of which are members of the Tanrikulu family. While the trust's business is not of the same magnitude as Costa Vraca's business, it has made some substantial profits in recent years. For example, the net profit for the year ending 30 June 1998 is in excess of $433,000 and the net profit for the financial year ending 30 June 2001 was expected to be in the vicinity of $1 million. The sales in the financial year to 30 April 2001 were in excess of $3 million. The balance sheet as at 30 April 2001 disclosed net assets of $959,862.80. However, the net assets are broadly equal to that current years taxable income which will, in the usual course, be distributed to the beneficiaries of the trust. 94 Unlike Mercuri, Tanrikulu has a right of indemnity against the trust assets in respect of costs and expenses incurred. The Australian respondents' claim that the modest asset position of the Tanrikulu family trust; the fact that the net income for the trust is distributed from year to year to beneficiaries with the consequence that its net asset position may not be increased; and the fact that the members of the family will be those receiving the benefit of the damages claimed in the litigation, justify an order for security for costs. 95 Tanrikulu has carried on a substantial business for some time but does not have net assets of any significance, as it distributes its net income to its beneficiaries. While a significant portion of the income distributed to beneficiaries might be lent back to the trust, the beneficiaries have not offered to subordinate the trustee's indebtedness to them to any indebtedness the trustee may incur in respect of costs. 96 In the circumstances I am satisfied that there is a reasonable possibility that Tanrikulu will be unable to pay the costs of the Australian respondents if it fails in its claim. For much the same reasons I have given for ordering security in Mercuri, security should be ordered against Tanrikulu. While it has a right of indemnity the absence of a likelihood of net assets creates a real risk of costs orders not being met. Initially, the amount of security is to be $20,000. As I explained in respect of Mercuri this amount can be reviewed in due course. (d) Eren 97 Eren is a $2.00 company with one share being held by two members of the Eren family. Eren owns several properties all of which are mortgaged to the Commonwealth Bank of Australia, which also has two registered fixed and floating debenture charges over the whole of Eren's assets. No other financial information is available about Eren's assets or its business. 98 I have concluded that Eren's case is to be equated with that of Mercuri and Tanrikulu, in the sense that it is clear that persons are standing behind the company, as shareholders, who will gain the benefits of the litigation and, having decided not to be forthcoming with their own assets or the company's assets (which are mortgaged or charged), should bear some risk of the costs of the litigation. 99 In the circumstances I am satisfied that the s 1335(1) threshold has been met and security for costs is appropriate for much the same reasons I have ordered security in Mercuri and Tanrikulu. However, the amount of the security should reflect the fact that Eren's claim is substantially smaller than a number of the other claims. In the circumstances I propose to order that security for costs in the sum of $10,000 by payment or by way of bank guarantee, be provided by Eren. The question of further security can be reviewed in much the same manner as I provided for review of further security in Mercuri's and Tanrikulu's cases. (e) Banks 100 Banks is in a similar position to Eren. It is a family company with a share capital of $2.00. It does not own any real estate and has granted a fixed and floating charge over all its assets to the National Australia Bank. Very little financial information has been provided by Banks. However, the Australian respondents have adduced evidence that Banks suffered a net loss of $306,000 for the year ended 30 June 1999, a net loss of $229,473 for the year ended 30 June 2000 and it was estimated that it would make a net profit of approximately $35,000 in the financial year to 31 May 2001. The most recent accounts of Banks discloses that it has accumulated losses to 31 May 2001 of $500,777 although Banks expected "to continue with improvements to its trading and financial position". While Banks attributes its loss of $229,473 in the year ended 30 June 2000 to the infected seeds, it is clear that it has traded at a loss in other years. 101 There is no evidence as to Banks' net financial position or as to the financial position of the Banks family members standing behind the company. This is another case of those who will gain the benefit of the litigation, standing behind the applicant without being prepared to bear any of the risks of the litigation. For substantially the same reasons I have given in Mercuri, Tanrikulu and Eren, it is my view that those standing behind Banks, who I infer will bear ultimate responsibility for the funding of its claims, should bear some of the risks involved in the litigation. Accordingly, I have concluded that an appropriate order for security for costs, which should have regard to the amount being claimed by Banks, should be made. The amounts to be ordered for security for costs at this stage is $15,000 or a bank guarantee in that amount. The amount of security is to be subject to review in due course for the reasons I have set out in Mercuri. 102 Although it was asserted an order would stultify the litigation I do not accept that will be so in respect of the amount I propose to order to be provided for security. In any event, there is no evidence to support this assertion, nor is there any evidence as to the impecuniosity of those standing behind Banks. I would add that the offer made by Banks not to dispose of assets is of little utility in view of the absence of evidence as to the value of the net assets of Banks. Costs 103 The Hazera respondents have failed in their application to set aside service and to set aside the proceeding under O 9 r 7. It seems to me that costs should follow the event with the consequence that the Hazera respondents should pay the applicants' costs of and incidental to the Notices of Motion of the Hazera respondents. I am also of the view that costs should follow the event in respect of each of the security for costs applications. Accordingly, Coralberry and Bell Regal are to pay the costs of Costa Vraca but Mercuri and Tanrikulu are to pay the costs of Bell Regal and Coralberry. Eren is to pay the costs of Bell Regal and Banks is to pay the costs of Coralberry and Gumrange. Conclusion 104 For the reasons set out above the Notices of Motion dated 15 February 2002 of the Hazera respondents are to be dismissed with costs. The application by Coralberry and Bell Regal for security for costs against Costa Vraca is to be dismissed with costs. Mercuri and Tanrikulu are to provide security for the costs of Coralberry and Bell Regal by payment or bank guarantee in the sums of $20,000 each and are to pay the costs of Coralberry and Bell Regal for their security for costs applications. Eren is to provide security for costs by payment or bank guarantee in the sum of $10,000 for the costs of Bell Regal, and is to pay the costs of Bell Regal in respect of their security for costs application. Banks is to provide security for costs by payment or bank guarantee in the sum of $15,000 for the costs of Coralberry and Gumrange, and is to pay the costs of Coralberry and Gumrange in respect of their security for costs applications. I certify that the preceding one hundred and four (104) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Merkel.

Costa Vraca v Bell Regal Pty Ltd

At a glance

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Judgment (22 paragraphs)

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Legislation Cited (5)

Cases Cited (22)

Cited By (8)