Darelvale Holdings Australia Pty Ltd v Waterjet Designs Pty Ltd

REASONS FOR JUDGMENT 1 On 30 May 2002 the applicant commenced a proceeding in the Court claiming that the respondents infringed its copyright in certain artistic works, being geometric tile designs claimed to be authored by an employee of the applicant. The respondents have denied liability in respect of the claims. Although the solicitors for the respondents first expressed the respondents' concern about the applicant's ability to satisfy a costs order and raised, with the applicant's solicitors, the question of an application for security for costs on 25 June 2002, the respondents did not make their application for security for costs until 1 May 2003. As a result of a number of adjournments, and of the extensive affidavit material filed by the parties, the respondents' application for security for costs did not come on for hearing until 1 August 2003. 2 The respondents relied upon s 56 of the Federal Court of Australia Act 1976 (Cth) ("the FCA Act"), O 28 r 3(1)(b) of the Federal Court Rules 1979 (Cth), and s 1335 of the Corporations Act 2001 (Cth). Although the Court has a general discretion under s 56 of the FCA Act the parties approached the application for security for costs on the basis that, as a matter of practical reality, the respondents would have to meet the threshold test laid down in respect of an earlier version of s 1335(1) by von Doussa J in Beach Petroleum NL v Johnson (1992) 7 ACSR 203 ("Beach Petroleum") at 205, where his Honour 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 fairly 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 taken into account in the exercise of discretion, and in framing the orders of the court if the decision is to order security." 3 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. At the outset it is appropriate to consider the circumstances of the present case that are of particular significance to the respondents' application. 4 The first circumstance concerns the respondents' delay in applying for security for costs. I am not satisfied that any sufficient or satisfactory reason has been put forward by the respondents for the delay. It is clear that the respondents were in a position to make an application for security for costs by early July 2002. At that time the respondents were aware that the applicant had a paid up capital of only $2.00 and that the applicant had refused to accede to the respondents' request for access to its financial records. Further, the solicitors for the respondents had informed the solicitors for the applicant on 28 June 2002 that if the financial records requested by the respondents were not made available then the respondents would make application for security. No such application was made until 1 May 2003, by which time the matter had proceeded to an unsuccessful mediation; pleadings and amended pleadings had been delivered; and significant interlocutory steps (including discovery) had taken place. During the intervening period the applicant expended in excess of $31,000 in legal fees. 5 The second circumstance relates to the merits of the proceeding. The current amended pleadings raise substantial issues of fact and law. It is unnecessary to detail those issues as it appears to be common ground between the parties that both the applicant and the respondents are acting bona fides in making the claims and stating the defences that they have respectively raised and that those claims and defences have been properly raised by them in the present proceeding. 6 The third circumstance concerns whether there is a real chance that the applicant will be unable to pay the respondents' costs if the applicant is unsuccessful in the proceeding. The applicant conducts a small business primarily for the benefit of its two shareholders, who are its directors. That business has been conducted profitably and is continuing to grow. The applicant's assets include trade debtors, stock in trade, goodwill, cash at bank and plant and machinery. The applicant claims to have total assets as at 31 May 2003 of approximately $363,000, total liabilities of approximately $271,000 and net assets of approximately $92,000. The applicant's business remains profitable, has significant work in progress and is said to have approximately $45,000 working capital. There is no evidence that the applicant has not paid its debts as and when they fall due. 7 However, as is explained in the evidence filed on behalf of the respondents, after taking account of the realisable value of the applicant's assets, the extent to which the applicant's profitability depends on the directors not requiring payment of salaries for their services, and the funds the applicant will require for the conduct of the litigation through to trial, there appears to be a real chance that the applicant will be unable to pay the costs of the respondents if judgment goes against it. While the degree of likelihood of that occurring is problematic the respondents appear to have met the threshold outlined by von Doussa J in Beach Petroleum. 8 Another aspect of the factual circumstances that requires consideration concerns the appropriate forum for the present proceeding. In the course of the proceeding it has become apparent that the amount to which the applicant may be entitled if it is successful in its claim might be less than $60,000 with the consequence that it may be appropriate for the matter to be determined in the Federal Magistrates Court. However, it is only since 13 May 2003 that the Federal Magistrates Court has had the relevant jurisdiction under the Copyright Act 1968 (Cth): see s 131D of that Act. The applicant is now seeking the transfer of the proceeding to the Federal Magistrates Court pursuant to s 32AB of the FCA Act but the respondents are not prepared to consent to the transfer at this stage as they contend that "the proceedings raise complex and difficult areas of copyright law, such as the definition of works of artistic craftsmanship and the copyright/design overlap under ss 74-77 of the Copyright Act 1968 (Cth)". The respondents' current position is that no transfer order should be made or contemplated until the Court can give further consideration to that issue at the next directions hearing to be held on 19 September 2003. 9 Finally, the applicant is essentially a two person company as it has only two shareholders, who are also employed by it and are its directors. It has a paid up capital of $2.00. While there can be no criticism of any of those matters the fact is that, indirectly if not directly, the beneficiaries of the litigation will be the two shareholders who, in the absence of evidence to the contrary, are likely to be called upon to fund some of the costs of the litigation. Thus, the present case is one in which, to some extent, the persons most likely to benefit from the litigation are not at risk in respect of the costs of that litigation. In that context the fact that the two shareholders have only subscribed for capital in the sum of $2 leaves them open to the claim that they are seeking the benefits of the litigation without bearing any of its risks. 10 It is now necessary to consider whether the Court should exercise its discretion to order security for costs. The factors that tend against ordering the security for costs requested by the respondents include: · the applicant has a bona fide and substantial claim which was quite properly brought by it in the Court; · the delay of the respondents in making their application for security for costs; · the apparently profitable and solvent business carried on by the applicant, albeit that there is some uncertainty as to whether it will be able to pay the respondents' costs if it is unsuccessful in its claims against the respondents; · the applicants profitability might have been affected by the conduct of the respondents, which is the subject of the present proceeding; and · the applicant wishes to minimise the future costs of all parties to the proceeding by applying for a transfer of the proceeding to the Federal Magistrates Court. 11 The factors that tend to favour ordering security for costs include: · the respondents have met the threshold test stated by von Doussa J in Beach Petroleum; · the costs of the future conduct of the proceeding may be substantial; · there is no evidence that a security for costs order would stultify the future conduct of the proceeding; and · the absence of any undertaking to be liable in respect of costs by the two shareholders of the applicant, who will be the real beneficiaries of the litigation in the event that it is successful, or of any evidence that they are themselves impecunious: see Rosenfield Nominees Pty Ltd v Bain & Co (1988) 14 ACLR 467 at 472-473; Acohs Pty Ltd v Merck Ltd (unreported, Merkel J, 20 June 1997) at 2-4 and Costa Vraca v Bell Regal Pty Ltd [2003] FCA 65 at [77]. 12 The most significant factor in favour of an order for security for costs is that the two shareholders of the applicant should not be able to stand by and obtain, albeit indirectly, the benefits of the litigation without bearing some risk in respect of the respondents' costs in the event the application fails. As explained above, neither of the shareholders has undertaken to be liable for costs or presented any evidence of impecuniosity. In these circumstances, weighing up the factors referred to above, I have concluded that it is appropriate that a security for costs order be made. However, three particular factors have led me to conclude that it is also appropriate to discount the amount of security that might otherwise have been ordered. 13 First, I regard delay as a factor weighing strongly against the application of the respondents for security for all of the costs incurred to date and for all of its future costs. In Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 514 French J observed: "The further a plaintiff has proceeded in an action and the greater the costs it has been allowed to incur without steps being taken to apply for an order for security for costs, the more difficult it will be to persuade the court that such an order is not, in the circumstances, unfair or oppressive." 14 The relevant principles in relation to delay were more recently considered by Einstein J in Idoport Pty Limited v National Australia Bank Limited [2001] NSWSC 744 ("Idoport") at [69]-[81]. Einstein J stated in Idoport at [80]-[81] that, ultimately, delay "is best regarded simply as a factor whose consequences are to be weighed in the balance in determining what is just between the parties". 15 In my view it is just that the respondents' delay should have two consequences. First, it is not appropriate to include in any security to be ordered any amount in respect of costs incurred by the respondents during the period of the delay. During that period the applicant, by the respondents' inaction, was entitled to believe that no application for security was being made and can be taken to have conducted the proceeding, and to have engaged in the interlocutory steps taken during that period (which included the mediation), on that basis. In all the circumstances the respondents' delay should also be taken into account as a factor in support of discounting the quantum of any security that might be ordered in relation to the conduct of the proceeding since 1 May 2003. 16 The second factor in favour of discounting the security is the applicant's endeavour to now have the proceeding transferred to the Federal Magistrates Court. If there is to be such a transfer the quantum of future costs will be considerably reduced. While I do not regard the respondents' failure to agree at this stage to that course to be inappropriate it seems to me that their failure to agree to the transfer is relevant as, if the matter remains in the Federal Court, and should therefore be subject to higher costs, it will probably be because the Court has acceded to the respondents' request that the proceeding remain in the Federal Court. In those circumstances it is just that the respondents carry some risk in respect of the additional costs that may thereby be incurred. 17 The third factor is that I have concluded that the degree of likelihood of the applicant not being able to pay the respondents' costs if it fails in its claims is "problematic". 18 In all the circumstances I have concluded that it is appropriate to make an order for security for costs in respect of the costs the respondents have incurred since 1 May 2003 and are likely to incur hereafter on the basis that the hearing of the proceeding is to take no more than five days. If it appears that the trial may exceed five days then I would reserve liberty to the respondents to apply for a further order for security. The security, discounted for the reasons set out above, that I regard as appropriate is security in the sum of $20,000 in the form of bank guarantee, or such other form of which a Registrar of the Court approves. As both parties have succeeded to some extent on the security for costs application I regard it as appropriate to order that the extensive costs incurred in respect of the application be the parties' costs in the cause. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Merkel.