Gray v Cancer Research Institute Incorporated [2007] FCAFC 149 | Case summary

THE COURT: 1 These are appeals from an order made by Graham J approving an agreement entered into between the University of Western Australia ("the University") and the Cancer Research Institute Incorporated ("CRI"). 2 The agreement came before Graham J for approval following an order made by French J on 22 December 2006 when he extended the powers of the receiver (previously appointed) of the shares of Sirtex Medical Limited (ACN 078 166 122) ("Sirtex") held by CRI. The order empowered the receiver to enter into a settlement, on CRI's behalf, with the University. Specifically, the receiver was given the power to: (a) determine the position that the third respondent should take in these proceedings; (b) have the conduct of these proceedings on behalf of the third respondent; (c) instruct solicitors to appear and to file and serve any documents in the proceedings; and (d) subject to the approval of the Court, enter into and give effect to any agreement for the resolution of all or part of these proceedings so far as they affect the third respondent. 3 The proceedings to which the order referred were between the University and Bruce Nathaniel Gray ("Dr Gray") and others, including Sirtex and CRI, then listed before French J for final hearing commencing on Monday, 12 March 2007. 4 The agreement was in the nature of a settlement agreement which was made on 22 February 2007 and subsequently amended on 2 March 2007. It provided for the establishment of a new charitable trust to be known as "the Cancer Research Trust". By clause 4 it was provided that upon the constitution of the Trust and the appointment of its inaugural Board of Management, CRI would transfer to the Trust all of its assets. The only assets of any worth owned by CRI were its holding of shares in Sirtex which were acquired in consideration of its assignment to Sirtex of certain intellectual property and which formed part only of the intellectual property the subject of the principal proceedings before French J. 5 The application for approval before Graham J was conducted in circumstances of urgency and proceeded with the assistance of video-links with parties who were, at various times, in Sydney, Perth and Melbourne. The application was heard over some days in the week prior to the Monday upon which the trial had been listed to begin. The trial was expected to be of substantial duration as, indeed, proved to be the case. 6 On 7 March 2007, the hearing of the application for approval resumed for its final day at 4.43pm, AESST. Witnesses were orally examined and submissions by the parties, for and against the approval of the agreement, were made. The proceedings concluded at 8.34pm or thereabouts, AESST. As the hearing concluded, Graham J said: I will stand the matter over to 1.00pm Western Daylight Saving Time tomorrow, Thursday, 8 March 2007, for judgment. 7 His Honour continued: I have got numerous matters in Court in Sydney at 9.30, I have a hearing at 10.15, a hearing at midday, and hopefully I'll find a few minutes before 3:00pm to record my final thoughts in relation - or at least to plan my thinking in relation to the judgment I'll endeavour to deliver at that time. 8 The material before Graham J included written advice that the approval of the agreement was in the best interests of CRI. Approval was, however, opposed by Sirtex and Dr Gray, Sirtex asserting that it was a contingent creditor of CRI and potentially liable to suffer prejudice if the agreement were put into effect. It claimed that the potential prejudice arose by reason of its pleaded cross-claim against CRI, in which it asserted a breach of warranty by CRI as to its ownership of certain intellectual property. CRI had asserted that it acquired its shares in Sirtex in the circumstances described above at [4]. It said that the effect of performance of the agreement would be to put CRI's assets beyond the reach of Sirtex and in that way deprive it of the fruits of any judgment on its counterclaim against CRI. 9 It should be noted, however, that if the University were successful in its claim against Sirtex in relation to the intellectual property, whether in whole or in part, Sirtex's cross-claim against CRI would only be established to the extent that the University was successful in relation to the assigned intellectual property. 10 In reasons delivered the next day Graham J said, at [38]: This brings me to a consideration of the position of Sirtex. At first blush, one would say that an agreement should not be approved which would lead to a divestiture of assets by one of the parties when claims are made by another party which, if successful, could not be met once the assets had been divested. Sirtex, of course, does not claim to be a creditor of CRI, rather it claims to be a contingent creditor and says it will not have any claim on CRI unless it fails in its defence of the proceedings brought against it by the University. 11 His Honour continued, at [39]: In this context, one has to pay regard to the terms of the communications made by senior counsel for Sirtex to the Court on 5 and 25 October 2006 and, more importantly, to the letter of 10 October 2006 written by Sirtex's solicitors to the solicitors for CRI, to which reference has been made above. It is clear that the letter was written in circumstances where a settlement agreement was either in place or may thereafter have been put in place which involved a stripping of the assets of CRI. In the face of such a possibility, Sirtex indicated that if such a settlement was reached it would either not proceed to file a cross-claim against CRI or, if it had already done so, would seek leave to discontinue any cross-claim which had been filed and served. As mentioned earlier, no cross-claim had been filed and served at the time when the letter was written. 12 His Honour said, at [40]: The letter has not, in terms, been withdrawn. Much of the evidence before the Court on the approval application has been directed to the question of whether or not Sirtex is estopped from effectively withdrawing from the position which it declared in the letter as a matter of law. It does not seem to me necessary for the Court to resolve the issue of estoppel on this application. The important question for the Court is to decide how to exercise its discretion on the approval application. It seems to me that given its standing as a contingent but only a contingent creditor of CRI, Sirtex cannot be heard to complain about the approval of the Amended 22 February 2007 Agreement in the face of the letter of 10 October 2006. It seems to me that the question of approval of an agreement for which the orders of the Court of 22 December 2006 provided should be decided in the interest of justice and I consider that the Amended 22 February 2007 Agreement is one which should be approved. 13 His Honour added, at [41]: Plainly, it would be inconsistent for the University to maintain its freezing order in the light of the approval of the Agreement, and no doubt an order will be sought for the dissolution of that freezing order to allow the Agreement, to which the University is a party, to be implemented. If Sirtex wishes to itself apply for a freezing order in respect of the assets of CRI, that is a matter for it and no doubt is a matter where questions of estoppel may well arise in determining whether or not relief should be granted. 14 Sirtex asserts that the exercise of his Honour's discretion miscarried for two reasons. 15 First it argued that Graham J had taken the status of Sirtex as a contingent creditor as being different to that of a creditor, and that this was quite wrong. 16 It is indeed the fact that in the second sentence in [38] of his Honour's reasons, set out above, his Honour plainly acknowledges that ordinarily, if there is a valid contingent claim, approval would not be given. The learned judge's reasons need, however, to be seen in context. In the context of the evidence and the issues the subject of discussions between the judge and counsel on the evening of the last day of hearing - the day before judgment was delivered - it is plain that his Honour was directing his attention to the practical validity and value of the asserted contingent claim and that he was not contradicting himself. 17 In this connection, a brief reference should be made to passages in which, during the final evening of the hearing, his Honour sought the assistance of counsel. The following exchange is relevant (see p 241 of the appeal book): His Honour: If the stripping of the assets was resisted by somebody who did not demonstrate that there was a good reason for not stripping the assets, then why shouldn't approval follow? Mr Elliott: Well, I can't argue with that, your Honour, but, with respect, if there are proceedings on foot … and one party is being sued by another, with substantial damages… His Honour: You have made a claim against CRI. Have you advanced evidence to demonstrate that you've got a fair chance of success in your claim in this approval application? Mr Elliott: Others at the bar table may disagree, but we would certainly answer, "Yes", your Honour. His Honour: Well, what's the evidence that supports your claim that is before the court now? … Where is the evidence, please? Which affidavits, which exhibits, demonstrate that your client has a reasonably arguable case against CRI? Mr Elliott: The only affidavit at the moment I can refer to, which deals with one aspect of the claim against CRI, is the affidavit of Mr Wong. His Honour: Was that affidavit read or tendered? Mr Elliott: Yes, it was, your Honour. It was read. 18 His Honour then asked some questions about the evidence to which reference had been made (see at appeal book 243). Referring to the evidence of Mr Wong, the following exchange took place: Mr Elliott: That evidence is led simply to establish there is some loss in relation to the position of Sirtex because it has expended sums developing the technology or maintaining the patents… His Honour: Yes. Mr Elliott: …which are the subject of the claim by the University. I don't predominantly rely on any evidence to establish we have a good case, your Honour, because of the way in which it is put by way of the cross-claim which I took your Honour to at page 96 of the cross-claim… 19 The observations made by his Honour, to which exception is taken in support of the first contention, must be read in the context of these exchanges. If this is done, it is clear enough that his Honour's discretion was not exercised on a flawed foundation but that he was, as noted at [16], directing his attention to the practical validity and value of the asserted contingent claim. 20 The second basis upon which it is argued that the exercise of his Honour's discretion miscarried concerns his Honour's reliance on a letter dated 10 October 2006, in which Sirtex indicated its position in relation to the then proposed agreement. The letter was from its solicitors to the solicitors for CRI. It is addressed to the solicitor on the record for CRI and it confirms that the recipient does not act for the receiver. The operative part of the letter is in the following terms: During argument before French J on 5 October 2006, Mr Elliott SC informed the Court of his instructions in respect of the proposed cross‑claim against CRI. I formally record those instructions in this letter as follows: 1. If CRI settles with UWA, (or it is determined that CRI has settled with UWA), Sirtex will: 1.1 withdraw its application for leave to file a cross-claim against CRI in these proceedings; or 1.2 seek leave to discontinue any cross-claim which has been filed and served. 2. If the events in paragraph 1 above occur, Sirtex will not object to the current freezing orders against the shares of CRI being lifted or varied to permit any settlement to occur. 3. Sirtex otherwise reserves all of its rights against CRI and the above position should not be regarded as any concession in that regard. 21 Of this letter, Graham J said (at appeal book p 256) and referring, of course, to what had taken place on the previous evening: Well, could you tell me what the matters are that would militate against an approval going through in the light of the 10 October letter? Forget about what happened in court on 5 October and 26 October for the moment. There was no withdrawal of the decision, the letter [sic] is made clear by the letter of 10 October. Why shouldn't Sirtex be left in a position where it can't complain about an approval in the light of that letter? 22 Counsel's response was: Your Honour, the position under the 31 July 2006 agreement by clause 9 was that the agreement had to be subject to the approval of the CRI members. 23 There was further reference to this matter in his Honour's discussions with counsel. In the transcript (as reproduced at appeal book p 261), the matter arose again: His Honour: I don't think I'm asking you to address me on whether they were estopped and bound by it, rather a question of: how can your client reasonably be heard to complain about the approval of a settlement which you declared in the clearest of terms your client would agree to? Mr Elliott: I hear your Honour, and that is a different question. Obviously that is a matter for your Honour and your Honour can form a view on it one way or the other. It's submitted on behalf of Sirtex that when one looks at how matters developed, it's not reasonable - I will put it the other way. It is reasonable for Sirtex to take the position it now takes. 24 His Honour referred to the matter again (at appeal book p 263), in relation to the letter: His Honour: Anything more you want to say? Mr Elliott: In broad terms, no, your Honour. I gather your Honour is not asking me then to address the estoppel issue that's been raised. 25 His Honour then made this observation, which provides an important element of the context: I think the way that I would see it is this, that it is arguable that there may be an estoppel but it's unnecessary for the Court to make any decision on it for the purposes of determining the issue of approval. If that's the way my reasons were expressed, is there any need for you to say any more about it? Mr Elliott replied: "No, there's not, your Honour." 26 Reading his Honour's reasons in the context that we have outlined, which includes the argument recorded in the transcript of the hearing of the preceding day, it seems clear that his Honour was of the view that the letter indicated a lack of any serious concern, or basis for concern, about the proposed agreement. It suggests that his Honour had formed the view that Sirtex had not demonstrated that there was a good reason for not approving the agreement to transfer assets, and that that conclusion was fortified by Sirtex's appreciation of its position as reflected in the context of the letter written on its behalf on 10 October 2006, communicated twice to the trial judge - that is to say, to French J - and not resiled from. This was not a question of estoppel at all. 27 Senior counsel for Sirtex conceded that if the University were successful against Sirtex then, to that extent, it would also be successful against CRI and accordingly, even if only a partial judgment were entered for the University, it would only enliven the cross-claim against CRI to the extent of that success. Furthermore, counsel for CRI informed the Court that there was no evidence before Graham J that CRI had expended any moneys in the development of the intellectual property before its assignment. Counsel for Sirtex did not disavow this. It seems likely, therefore, that if the University were successful against CRI, the trust would be imposed over all of CRI's shareholding in Sirtex. That is a different question from the relief that the court might fashion for Sirtex. 28 It follows that the two principal criticisms of the primary judge's reasons are not sustained when those reasons are read, as they should be, in the light of their context, as we have explained. As to the first reason, his Honour was plainly not taking a technical view of the matter but was looking to whether there was real substance in the contention claim, and concluded that that had not been shown. In relation to the second matter, his Honour was correct in not being concerned with the question of estoppel. He was using the agreement for a legitimate purpose in the circumstances that we have outlined. 29 For these reasons, we are not persuaded that his Honour's discretion miscarried. Both appeals should be dismissed with costs. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable the Chief Justice, Justices Spender and Gilmour.

Gray v Cancer Research Institute Incorporated

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