First Netcom Pty Ltd v Telstra Corporation Ltd

Order 34 rule 2(1) provides as follows: "(1) Where a question for an expert witness arises in any proceedings the Court may, at any stage of the proceedings, on its own motion or on application by a party or the Registrar:

(a) appoint an expert as court expert to inquiry into and report upon the question;

(b) authorize the court expert to inquire into and report upon any facts relevant to his inquiry and report on the question;

(c) direct the court expert to make a further or supplemental report or inquiry and report; and

(d) give such instructions as the Court thinks fit relating to any inquiry or report of the court expert." 11 For a variety of reasons, Mr Amos was not able to report pursuant to his appointment under Order 34 as soon as might have been hoped. Accordingly, by notice of motion dated 6 August 1999, Telstra applied to the primary Judge for an order that, pending the production of the interim report in relation to the damages that First Netcom ought to pay in accordance with the undertaking, First Netcom provide security for damages in the sum of $1,295,381.90. Telstra also sought an order, until such time as First Netcom provided such security, restraining First Netcom from dissipating, selling, charging, mortgaging or otherwise dealing with the whole or any part of its assets otherwise than in the ordinary course of paying its ordinary trade creditors for the purpose of conducting its business. 12 On 17 March 2000, for the reasons then given (to be mentioned below), the primary Judge made the following orders: "1. [First Netcom] provide security for its undertaking as to damages given on 26 June 1997 in a form and manner satisfactory to a Registrar of the Court in the sum of $200,000 by not later than 4pm on Friday 14 April 2000, and in the further sum of $200,000 by not later than 4pm on Friday 5 May 2000. 2. pending the security of the first sum of $200,000, [First Netcom] not deal with its funds and other assets otherwise than in the ordinary course of business."

THE REASONING AT FIRST INSTANCE 13 His Honour said: "The argument on each side was simple. Telstra said that First Netcom was knowingly insolvent from the time it first sought the injunction, indeed from the time it commenced business with Telstra, and that its insolvency was the reason it was not paying Telstra's accounts. It said that First Netcom's claim not to be paying because it genuinely disputed the accounts was humbug and dishonest. First Netcom argued that it did not pay the accounts because Telstra owed it more than it owed Telstra and that its insolvency or impecuniosity was due to Telstra's conduct as set out in its cross claim. It said that the cross claim is serious and substantial and that the uniqueness and either lateness or prematurity of this application for security (depending on which part of the submissions is being read at the time) should give way to the cross claim's weight." 14 The primary Judge, holding that First Netcom was insolvent, proceeded to reject First Netcom's contentions. His Honour went on to say: "Although no case was cited as a precedent for doing so, I am satisfied that it is appropriate to order security and that there is jurisdiction to do so. The evidence presented by Telstra of its losses suggests a figure of around the $1.3 million sought. This figure would not be appropriate, however, because First Netcom's rate of recovery from its customers may only have been about 50% of what it billed, the inference apparently being that the other 50% were disputed by the customers. Telstra argued for a finding that by comparing other figures, a rate closer to 80% was collected. On the other hand, the cross claim covers the period in question here as well, and allowance must be made for its impact. The choice in these circumstances will always be difficult but I have chosen a little over 30% as a fair proportion of the amount claimed. Security is therefore to be provided in the sum of $400,000, $200,000 within 28 days and $200,000 within 21 days thereafter in a form and manner satisfactory to a Registrar. I grant a partial Mareva injunction on the basis of the evidence that the financial situation of First Netcom appears to be worsening and that there is a real risk that it otherwise might dissipate the funds it has. Until the first amount of security is provided, First Netcom is therefore ordered not to deal with its funds and other assets other than in the ordinary course of business." 15 On 4 May 2000, First Netcom applied to the primary Judge for leave to appeal from these orders. In granting leave to appeal, his Honour gave reasons, but also made further orders in respect of security for First Netcom's undertaking as to damages. The primary Judge said: "The judgment [of 17 March 2000] had for relevant purposes two quite distinct elements. It ordered first the provision of security in respect of [the] undertaking as to damages given by First Netcom on 26 June 1997 for the making of an injunction which was subsequently discharged. In short terms, the reason for that order was that the circumstances energising a claim for damages by Telstra had occurred and Telstra had supplied satisfactory evidence in the proceedings which led up to the judgment of 17 March, of having suffered substantial damage as a consequence of the imposition of the injunction at the time. I did not at that stage impose the sanction of a stay of any part of the proceedings pending the supply of that security for two reasons. One was that the parties had not expressly argued the question of a stay in the course of the proceedings. The second reason, which was the principal one, was that there seemed to me to be some doubt as to whether a stay of the cross claim, which was the only effective practical sanction that could have been added, was in the best interests of Telstra as the party in whose favour it would have been intended to operate. As I explained this view at previous proceedings, it is not necessary to detail it now. It will suffice to say that in the nature of these proceedings, giving Telstra the right to present its claim and putting the cross claim off to another time or to another proceeding, might not serve the interests of justice even from Telstra's own narrow point of view, quite apart from the public interest." 16 His Honour went on to say: "As to the security for the undertaking as to damages, I accept that the basis upon which I granted this security is an appropriate subject for an appeal. Whether such an order is available or appropriate is, I think, not settled in legal terms so far as the authorities go. I explained in the judgment of 17 March why I thought it should be granted in this case and there is no reason to add any more now except to say that this [is] in quite a different category to the usual application for security for costs or even security for damages in that a prima facie entitlement to damages has arisen and there was ample evidence to suggest that substantial damage had been caused. Accordingly, it is not in the same category as a case where liability for damages has not yet been proved and no actual evidence has been presented, other than particulars or pleadings, of damage actually suffered. On the other hand, as I put to the parties on a previous occasion, it seemed to me that if the appropriateness of that order went to the Full Court by leave, it may have an unsatisfactory result if only because without a sanction, the order, even if wrong, was causing no difficulty to any of the parties or to the litigation. There would thus be at least some chance that the Full Court might decide not to entertain the appeal because it was entirely theoretical. At the same time it must be said that there is not much point in the Court making an order without providing a sanction for its compliance. Having at my request considered the matter carefully, Telstra has now asked for the sanction to be added so that pending the supply of the security, the cross claim is stayed. I can think of no other sanction that could be imposed that would have any relevance to the proceedings and I propose to make the order sought. Consequent upon that order, I will grant leave to First Netcom to appeal the 17 March judgment granting security for the undertaking as to damages." 17 The Primary Judge then made the following orders on 4 May 2000: "1. [Telstra's] application for a stay of the cross-claim in these proceedings is granted pending the payment by [First Netcom] of security for [Telstra's] costs on the cross-claim in the amount of $50,000 and the payment by First Netcom of security for an undertaking as to damages given on 26 June 1997 in the amount of $400,000, in a form and manner satisfactory to a Registrar of the Court. 2. [First Netcom] is granted leave to appeal from the judgments of 17 March 2000 and 4 May 2000."

CONCLUSIONS ON THE APPEAL 18 The practice is settled that, not only on ex parte applications but on a motion on notice, in seeking an injunction which is to operate until the determination of the action or further order, the plaintiff should give an undertaking as to damages - see Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd (1979) 146 CLR 249 ("Air Express") per Aickin J at 260. The origin of this remedy is equitable (per Aickin J at 262). 19 In Air Express (above) Gibbs J said (at 311): "The object of requiring a plaintiff who seeks an interlocutory injunction to enter into an undertaking of this kind is to attempt to ensure that a defendant will receive compensation for any loss which he suffers by reason of the grant of the injunction if it appears in the event that the plaintiff was not entitled to obtain it. The insistence upon the giving of an undertaking is a very important, if not an essential, means of preventing injustice from being done by the court when it makes an order at an interlocutory stage, before the rights of the parties have been finally determined." 20 Stephen J said (at 318-319): "What occurs when such an undertaking [for damages] is extracted from a plaintiff is that the court, as a condition of its grant of interim or interlocutory injunctive relief, has ensured that, should it turn out that that relief should never have been granted, it will have the power, so far as monetary compensation allows, to make good the harm which the grant has done to the defendant. The court acquires powers to do justice between the parties which it would not otherwise possess. As North J. said in Attorney-General v Albany Hotel Co: 'If it should subsequently appear that such an order had been improvidently made, it is difficult to see how, in the absence of such an undertaking, the defendant could recover from the plaintiff the damages which were really sustained by him by reason of the improper order of the Court.' Damages awarded under such an undertaking are, therefore, of a rather different nature from those awarded at common law. Their special character appears from the fact that their source lies in the plaintiff's own voluntary undertaking, given as the price of obtaining an injunction." [Emphasis added] 21 To similar effect were observations made by Mason CJ, Brennan and Deane JJ in National Australia Bank Ltd v Bond Brewing Holdings Ltd (1990) 169 CLR 271 at 277: "…the primary issue on the appeal to the Full Court was whether the primary judge had been in error in refusing to vacate or rescind the orders of 29 December 1989 appointing receivers. Those orders had been made ex parte and without any undertaking as to damages being proffered or required. It is clear that they should not have been made in those circumstances. The orders should have been rescinded or vacated when the matter came again before the learned primary judge, in the continued absence of any proffered undertaking as to damages even at that stage." 22 It follows, then, that the giving of an undertaking is, in general, an essential condition of the grant of an interim injunction. But although an appropriate undertaking may be proffered by the plaintiff, there is no compulsion upon the plaintiff that the undertaking be given. In that sense, as Stephen J observed in Air Express (above), the giving of the undertaking is an entirely voluntary act on the part of the plaintiff. This is illustrated by the traditional form of order by way of injunction. The order is made in these terms: "Upon the plaintiff giving the usual undertaking as to damages, the Court orders …(etc)..." In other words, the coming into operation of the injunction is dependent upon the giving of the undertaking. If the undertaking is not forthcoming, the injunction will never come into effect. That is to say, the order is made conditional upon a contingency which, if not satisfied, has the effect that the injunction itself, which is merely inchoate, never comes into effect. The foundation of the practice is the discretionary nature of the grant of an interim injunction. The exercise of the discretion is almost invariably conditional upon the plaintiff's being willing to proffer an undertaking as to damages. The plaintiff can elect to give the undertaking, in which case the injunction will run; or the plaintiff can decline to give the undertaking, in which event the injunction will not run. 23 There is a "usual" form of undertaking as to damages. However, since its terms are a matter for the discretionary judgment for the court, its provisions will be moulded so as to fit the circumstances of the case at hand. These circumstances may include the likelihood of the plaintiff's insolvency, which might produce an inability to discharge any liability to the party enjoined pending a final hearing that might accrue under the undertaking. In that event, the Court is required to exercise its judgment as to what is appropriate in order to ensure the reality of adequate compensation, and not merely an empty form of compensation, to a party who is ultimately successful. 24 In such a case the court may stipulate a further condition in connection with the undertaking, in the event that the plaintiff should elect to give the undertaking, and thus secure the injunction. The extra condition could be that any contingent liability under the undertaking be appropriately secured - for example see Select Personnel Pty Ltd v Morgan & Banks Pty Ltd (1988) 12 IPR 167. Again, the plaintiff can elect to comply with this condition or decline to do so, but must accept the consequences of its election. 25 It follows that in strictness the only order made by the Court on an application for interim relief is the injunction itself. It is true that the operation of the injunction may be expressed to be conditional upon performance of a condition precedent. But the court does not direct, let alone order, the performance of such a condition. That is entirely at the plaintiff's election, with the consequences mentioned. 26 It further follows that such conditions cannot, of their nature, be conditions subsequent. Either the interim injunction comes into operation upon being made, or it does not. In other words, the condition cannot be imposed (or superimposed) retrospectively. 27 An attempt to impose such a condition after the event was considered in Commodity Ocean Transport Corporation v Basford Unicorn Industries Ltd ("The Mito") [1987] 2 Lloyds Rep, 197 where Hirst J said (at 198): "The background is that in September 1986 the plaintiffs obtained ex parte a Mareva injunction against the defendants and there was a cross-undertaking given by the plaintiffs in the normal form. I discharged that Mareva injunction on Nov. 25, 1986. Mr. McClure's application is for an order that security should now be given by the plaintiffs for their cross-undertaking. May I make it plain at the start that there is no doubt in my judgment that the Court has power at the time of either granting or extending a Mareva injunction to order security in support of the usual cross-undertaking, in other words to fortify the injunction by security in the manner which was ordered, for example, by Mr. Justice Roxburgh in the case of Baxter v Claydon, [1952] W.N. 376. In other words if the Court considers that the cross-undertaker, usually the plaintiff, might not be worth powder and shot if it be held that he is obliged to fulfil his cross-undertaking, the Court can strengthen the undertaking by requiring some sort of security. Here, however, manifestly, a very different situation arises because the Mareva injunction has now gone, though the cross-undertaking still, of course, stands because it was in force between the grant of the injunction in September and my discharge of the injunction on Nov. 25, 1986. But in one sense it is past history because whatever damage has flowed from the grant of the injunction, which I held should not have been granted, has now crystalIized, though it may be a very complicated exercise, as the evidence tends to suggest, to decide what exactly it amounts to. In another sense, of course, it is not past history because at some stage or another there will have to be an inquiry as to the damages sustained in order that an award, if any is proved, can be made under the cross-undertaking." 28 Hirst J went on to say (at 199-200): "When such security is originally sought it is sought as a condition for the grant of the injunction, in other words the plaintiff is told: 'if you want this injunction you have got to pay the price by fortifying the undertaking as to damages'. The plaintiff can then either agree or disqualify himself from obtaining the injunction." 29 In refusing to order security, Hirst J said (at 200): "… the Court has no power to impose an undertaking on the plaintiffs; and here I think that if I were to make this order I would in essence, ex post facto, be imposing an additional term to the undertaking, without any knowledge one way or the other as to what the situation would have been if it had been sought by the defendants in the first place. That is something which I think it is wrong in principle to do." 30 Hirst J added (at 200): "…what is to be the sanction for the security for which he asks? In the normal situation, as already demonstrated, the sanction is that if the plaintiff does not give the security he does not get his injunction. But that no longer applies because the injunction has gone." 31 In so concluding, Hirst J followed the Court of Appeal decision in Tucker v New Brunswick Trading Company of London [1880] 44 Ch D 249. There, the third party (Lamplough), who had not appeared on an application for interim relief, which was granted on terms that an undertaking as to damages was given to another party, appealed, asking that the benefit of the undertaking be extended to him. Cotton LJ said (at 252): "As regards Lamplough, I am of opinion that his appeal fails; for we cannot impose on the Plaintiff any undertaking which he has not given. If a defendant applies for an undertaking, the plaintiff may decline to take any order. The Court only makes the undertaking a condition of granting an injunction; if the plaintiff refuses to give it the Court can refuse the injunction, but it cannot compel the plaintiff to give an undertaking." 32 Lindley LJ said (at 253): "An undertaking is the price of an injunction, and if a man gets an injunction he must pay the price. Lamplough did not ask for an undertaking, and for anything we can tell, if he had done so the Plaintiff would have declined to take an injunction." 33 As Lord Diplock said in F Hoffmann-La Roche & Co AG v Secretary of State for Trade and Industry (1975) AC 295(at 361): "The court has no power to compel an applicant for an interim injunction to furnish an undertaking as to damages. All it can do is to refuse the application if he declines to do so." 34 In the light of those observations, the order of the primary judge of 25 August 1997 ought not to have required the provision of security. Rather, his Honour should have made it a condition of maintaining the interlocutory injunction that First Netcom provide the security. It would then have been a matter for First Netcom to elect either to furnish the security or suffer the dissolution of the interlocutory injunction. 35 Indeed, in the light of the principles outlined above, it may be that that is the proper construction that should be given to the order made on 25 August 1997. Of course, it no longer matters because, prior to the date fixed for the provision of security, the Full Court dissolved the interim injunction. The order for security, of necessity, fell with the injunction. 36 Similar observations might be made concerning the orders of 17 March 2000 and 4 May 2000. However, it must be remembered that, by that stage, the Court was not concerned with security for compensation that the Court might think just in respect of the future or prospective operation of an injunction. Rather, the Court was concerned with the effective enforcement of the undertaking, which had already been given, to pay such compensation as the Court thought fit in relation to the past operation of the injunction. The injunction had operated from the date of its order on 16 July 1997 to the date of dissolution by the Full Court on 2 September 1997. 37 Thus, at that stage, his Honour was concerned with the preservation of the assets of First Netcom to ensure that, if First Netcom is to be called upon to pay compensation pursuant to the undertaking, it will have assets sufficient to enable it to comply with the undertaking. In other words, his Honour was concerned with a situation analogous to that involved when a court is asked to make a "Mareva order" - see Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 and Jackson v Sterling Industries Ltd (1986) 162 CLR 612. 38 A "Mareva order" is to prevent a defendant from disposing of his assets (including claims and expectancies) so as to frustrate the process of the Court by depriving a claimant of the fruits of any judgment obtained in his favour. It is confined to preserving assets until after judgment or, arguably, until there has been an opportunity to seek execution - see Jackson v Sterling Industries Ltd (above) at 625-626. Such a principle can be applied by analogy to the circumstances where, as a condition of obtaining equitable relief, a claimant has given an undertaking as to damages. The order would then be designed to prevent frustration of the process of the Court by the party obtaining the injunction depriving any party adversely affected by it of the benefit of any compensation that the Court thinks just in the circumstances. 39 In a rare case, it might be appropriate that such an order require the defendant actually to deliver assets to a named person or even to the Court itself. In a most exceptional case, the power of the Court may extend to the appointment of a receiver of all or part of the assets of a defendant company - see Jackson v Sterling Industries Ltd (above) at 625. 40 It may be that, by making Order 1 of 17 March 2000 and Order 1 of 4 May 2000, his Honour was intending to exercise the rarely exercised discretion to require First Netcom to deliver assets to the Court for their better preservation. However, his Honour made no finding to that effect. Counsel for Telstra referred to evidence before his Honour demonstrating that very substantial assets of First Netcom had been paid away, partly in making advances to related companies and partly for other purposes. That evidence would clearly have justified the making of an order in the nature of a "Mareva order". Indeed, senior counsel for First Netcom indicated that First Netcom did not oppose the making of an order restraining First Netcom from dealing with its funds and other assets, subject to an appropriate exception to enable it to expend moneys in getting in its assets, which comprise, in the main, debts owing by its customers. 41 However, there was no finding by his Honour that, notwithstanding the making of an order restraining First Netcom from dealing with its funds and other assets otherwise than in the ordinary course of business, there would nevertheless be a threat that assets might be dissipated. That is to say, there was no finding that the circumstances constituted one of the rare occasions when a "Mareva order" would require assets actually to be delivered up. 42 Counsel for Telstra indicated to the Court that questions could arise as to what properly constitutes the ordinary course of the business of First Netcom. However, the order sought by Telstra in its application of 6 August 1999 employed similar language to that of the orders actually made. The notice of motion sought an order restraining First Netcom: "…from dissipating, selling, charging, mortgaging or otherwise dealing with the whole or any part of the assets of [First Netcom] otherwise than in the course of paying its ordinary trade creditors for the purpose of conducting its business." Unless there is reason to believe it would indeed give rise to a dispute, such a formula would constitute an appropriate exception to the restraint. If a question arose as to whether any disposition of assets was within the exception, that would be a matter for the primary judge either on an application for directions or on the hearing of a charge for contempt. 43 While the matter was not raised in argument, as a condition of the grant of a "Mareva order", the Court would normally require the usual undertaking as to damages to be given by the party seeking the order - see Cardile v LED Builders Pty Ltd (above) at 401. No such undertaking appears to have been given in the present case. 44 When the primary judge considered the application for leave to appeal from his orders of 17 March 2000, the time for the provision of the first tranche of the security in the sum of $200,000 had already expired. The time for the provision of the second tranche of security in the further sum of $200,000 was to expire on the following day. Thus, it was apparent, particularly in the light of his Honour's findings concerning the financial position of First Netcom, that there was no prospect of the security being provided. That appears to have been the justification for his Honour imposing, as a sanction for failing to provide security, a stay of the cross-claim filed by First Netcom. Nothing has been advanced on behalf of First Netcom to support a conclusion that the primary judge erred in imposing the sanction of a stay for non-provision of security in the sum of $400,000. The thrust of the complaint made on behalf of First Netcom was the mandatory nature of the orders for security made by the primary judge. 45 It is inappropriate to make any comment in this appeal about the intended effect of an order for the giving of security for costs. However, an order in the nature of a Mareva order is not intended to give, and should not have the effect of giving, any priority to the claimant in respect of the claim being pursued. Where an order is made for the purpose of preserving assets, including an order that the assets be delivered to the Court or be the subject of the appointment of a receiver, the order should not purport to create security over them in favour of the applicant in the sense of giving the claimant priority in the event of bankruptcy or winding up. The order should make clear that it goes no further than to deprive the defendant of possession of the assets simply for the purposes of precluding disposal of them so as to defeat the process of the Court. Thus, an order requiring the delivery of assets should make clear that the assets will be held on behalf of the defendant until after judgment or further order and will then be re-delivered to the defendant, unless they are made the subject of some claim on behalf of, for example, a person entitled to claim under a writ of execution or pursuant to an order of the Court in pursuance of an undertaking as to damages - see Jackson v Sterling Industries Ltd (above) at 626. 46 On the other hand, where, for example, the giving of security is a condition of the Court's not making a Mareva order or ordering a stay, different considerations may come into play. In such circumstances, the Court may consider that, as a condition of not ordering a stay or of not granting a Mareva order, the defendant should furnish security in the sense of giving priority in the event of insolvency. While the primary judge used the formula in his order of requiring First Netcom to "provide security for its undertaking", it is by no means clear that his Honour was intending to give Telstra priority in relation to the insolvency of First Netcom. There is nothing in his Honour's reasons suggesting that he had such an intention. On the other hand, the form of the order is such that it may be capable of having such an effect. 47 In the circumstances, the appropriate orders on the appeal would be as follows: (1) set aside Orders 1 and 2 made on 17 March 2000; (2) vary Order 1 made on 4 May 2000 by deleting the words "and the payment by the respondent of security for an undertaking as to damages given on 26 June 1997 in the amount of $400,000"; (3) upon Telstra giving the usual undertaking as to damages, order that First Netcom be restrained until further order from dissipating, selling, charging, mortgaging or otherwise dealing with the whole or any part of its assets without the prior written consent of Telstra otherwise than in the ordinary course of paying its ordinary trade creditors for the purpose of conducting its business; (4) grant liberty to the parties to apply on 3 days' notice for any variation of order (3) above; (5) order that the cross claim be stayed; (6) order that the stay referred to in order (5) above (but not any other stay) be dissolved upon First Netcom paying into Court the sum of $400,000 such sum to be held by the Court pending the determination of the amount of compensation, if any, that the Court may consider should be paid to any party adversely affected by the interlocutory injunctions ordered on 16 July 1997. 48 First Netcom has been partly successful in so far as the orders made by the primary judge have been varied. However, the effect of the orders proposed is not substantially different from the orders made by the primary judge. It would therefore be appropriate that there be no order as to the costs of the appeal. I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court.

Counsel for the Appellant: Mr P M Biscoe QC & Ms J S Gleeson

Counsel for the Respondent: Mr T F Bathurst QC & Ms L McCallum

Solicitor for the Respondent: Mallesons Stephen Jaques

Date of Hearing: 1 & 4 September 2000