Hi-Tech Telecom Pty Ltd v NEC Australia Pty Ltd

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 336 of 2012

BETWEEN: HI-TECH TELECOM PTY LTD (ACN 098 008 587)

JUDGE: ROBERTSON J DATE: 9 MAY 2012 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 By an interlocutory application filed on 19 April 2012, the respondent seeks orders as follows: (a) the applicant give security for the payment of the respondent's costs in defending this proceeding within 21 days and that the proceeding against the respondent be stayed until security is given; (b) if the applicant fails to comply with the order to provide security within the time specified in the order, the proceeding be stayed or dismissed. 2 The application is brought under s 56(1) of the Federal Court of Australia Act 1976 (Cth) and rule 19.01 of the Federal Court Rules 2011 and, expressly, not under s 1335 of the Corporations Act 2001 (Cth). 3 Section 56 of the Federal Court of Australia Act provides: (1) The Court or a Judge may order an applicant in a proceeding in the Court, or an appellant in an appeal under Division 2 of Part III, to give security for the payment of costs that may be awarded against him or her. (2) The security shall be of such amount, and given at such time and in such manner and form, as the Court or Judge directs. (3) The Court or a Judge may reduce or increase the amount of security ordered to be given and may vary the time at which, or manner or form in which, the security is to be given. (4) If security, or further security, is not given in accordance with an order under this section, the Court or a Judge may order that the proceeding or appeal be dismissed. (5) This section does not affect the operation of any provision made by or under any other Act or by the Rules of Court for or in relation to the furnishing of security. 4 The Federal Court Rules provide: 19.01 Application for an order for security for costs (1) A respondent may apply to the Court for an order: (a) that an applicant give security for costs and for the manner, time and terms for the giving of the security; and (b) that the applicant's proceeding be stayed until security is given; and (c) that if the applicant fails to comply with the order to provide security within the time specified in the order, the proceeding be stayed or dismissed. (2) An application under subrule (1) must be accompanied by an affidavit stating the facts on which the order for security for costs is sought. 19.02 Matters to be addressed by the respondent The respondent's affidavit should state the following: (a) whether there is reason to believe that the applicant will be unable to pay the respondent's costs if so ordered; (b) whether the applicant is ordinarily resident outside Australia; (c) whether the applicant is suing for someone else's benefit; (d) whether the applicant is impecunious; (e) any other relevant matter. Note Section 56 of the Act deals with security for costs. 5 As Greenwood J observed in Newtimber (Operations) Pty Ltd v Tarong Energy Corporation Ltd (No 2) [2011] FCA 123 at [10]: Section 56 of the Federal Court of Australia Act is not expressly predicated upon a "reason to believe" that an applicant will be unable to make good a costs order made against it in the light of "credible testimony". However, plainly enough, applications for security for costs in reliance upon s 56 of the Federal Court of Australia Act must be supported by material which suggests a proper basis for making an order for security and thus exercising the broad discretion conferred by the Act. In that case the Court was dealing with an application for security made in reliance upon s 1335 of the Corporations Act as well as s 56 of the Federal Court of Australia Act. 6 His Honour referred to Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; (2008) 20 VR 377 at [16], where Maxwell P and Buchanan JA said, in relation to s 1335: It may be said, with justification, that this is a low threshold. But the test simply reflects the policy of the provision, which is to protect a defendant against the risk of the plaintiff corporation's impecuniosity. The provision equips the court with the means to require that the defendant be secured against that risk. Greenwood J continued at [12]: Ultimately, of course, it is the expression of that risk which is the vice a costs security order is designed to meet in reliance upon the statutory jurisdiction conferred under s 1335 (by mitigating the risk of the plaintiff corporation's impecuniosity) or, for that matter, s 56 of the Federal Court of Australia Act. As to s 56, the discretion must be exercised judicially but "that is the only relevant limitation": Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 at 3 per Sheppard, Morling and Neaves JJ. 7 The parties before me joined issue on the question whether there was reason to believe that the applicant will be unable to pay the costs of the respondent if so ordered. The respondent submitted that this criterion had been satisfied on the evidence whereas the primary submission of the applicant was that the respondent had failed to show that there was reason to believe that the applicant will be unable to pay the costs of the defendant if so ordered. It was common ground that the trial itself would not occur until 2013. The substantive case on the pleadings 8 By its application, the applicant claims damages for breach of s 52 of the Trade Practices Act 1974 (Cth) and/or s 18 of Schedule 2 to the Competition and Consumer Act 2010 (Cth); damages for breach of contract; equitable damages arising from promissory estoppel and/or breaches of fiduciary duty arising from a joint venture; and for remuneration for work done and services and materials provided. The applicant claims a loss of between $65 million and $73 million. 9 The statement of claim states that the applicant provides Internet Protocol telephony products for resellers, businesses and individual end users. The respondent is a supplier and integrator of information and communications technology products to telecommunications carriers, government, businesses and consumers and it markets, both in Australia and globally, IP communications technology and equipment including NEC branded Private Branch Exchanges (PABX). So much is common ground. 10 The balance of the statement of claim is substantially controversial between the parties. 11 It is pleaded that as at September 2008 the applicant had developed software (iPhone VoIP client) which enabled the Apple iPhone to use Voice Over Internet Protocol (VoIP) over 3G and Wi-Fi networks using Session Initiation Protocol (SIP). 12 From about late August 2008 the respondent enquired whether the applicant was able to adapt its iPhone VoIP client to work with the respondent's branded SIP PABX telephone systems and the applicant indicated that it believed it could do so. 13 It is alleged that in late 2008 and thereafter on a continuing basis the respondent represented to the applicant that neither the respondent nor its parent company had its own iPhone VoIP client or other means to replicate the function of the applicant's iPhone VoIP client; that neither was developing an iPhone VoIP client or other means to replicate the function of the applicant's VoIP client; and that neither had engaged anyone else to develop an iPhone VoIP client or other means to replicate the function of the applicant's VoIP client. 14 It is then alleged that from late 2008 and thereafter on a continuing basis the respondent made a number of detailed representations to the applicant in return for the applicant adapting its iPhone VoIP client such that it would interface with the respondent's SIP PABX telephone systems and for the applicant's agreement not to offer the same product to any of the respondent's competitor PABX suppliers and otherwise to promote the respondent's marketing, selling and distribution of the applicant's iPhone VoIP client. 15 It is then alleged that on 8 December 2008 the applicant and the respondent concluded a joint venture agreement. 16 It is alleged that the respondent was under an express or implied contractual duty to the applicant in respect of the joint venture which duty included not to engage anyone else to develop an iPhone VoIP client or other means to replicate the function of the applicant's iPhone VoIP client or to develop, seek any other person to develop or obtain any equivalent or competing iPhone VoIP client; not to delay the release of the adapted iPhone VoIP client; and promptly to inform and disclose to the applicant all material facts. 17 It is pleaded that by October 2008 the applicant had successfully adapted its iPhone VoIP client to work with the respondent's SIP enabled PABX telephone systems and that the applicant devoted further time and resources on a continuing basis up until February 2010 carrying out additional work to the adapted iPhone VoIP client as requested by the respondent. 18 It is pleaded that in furtherance of the joint venture and at the express or implied request of the respondent, the applicant provided to the respondent on a continuing basis from September or October 2008 to February 2010 information and expert assistance in relation to the iPhone application development process. 19 Next it is alleged that on or about 15 February 2010 the respondent notified the applicant that the respondent had decided to undertake a parallel but independent development of a similar iPhone application. At about this time the respondent released its own VoIP client to the market, that client being called "EverPhone". 20 The applicant alleges that it had refrained from developing or offering any similar product to any of the respondent's PABX telephone system competitors at a time when its iPhone VoIP client was most valuable by reason of the applicant's pole position in the market and, further, refrained from competition with the respondent's SIP enabled PABX telephone systems by acquiring a Softswitch in the USA. 21 It is alleged that in releasing its own iPhone VoIP client to the market, the respondent took the information and expert assistance provided by the applicant to the respondent in furtherance of the joint venture and utilised that assistance for its own benefit and thereby breached the terms of the joint venture in its fiduciary obligations to the applicant. 22 There is also an allegation that the respondent included within its own VoIP client a particular file which was in fact a file written for the iPhone VoIP client at the applicant's expense. It is alleged that the respondent modified the file, renamed it and thus passed off the file as its own. 23 Breaches of contract are pleaded as are breaches of fiduciary duties and misleading and deceptive conduct. There is also a claim of promissory estoppel. 24 It is pleaded that the applicant has suffered loss and damage. Particulars are provided and based on the report of Richard Simes and the "take-up", as I have said, the applicant claims a loss of between $65 million and $73 million. Further or alternatively the applicant claims money payable by the respondent to the applicant for work done and materials provided by the applicant for the respondent at its request being the work done in and about modifying the applicant's iPhone VoIP client to interface with the respondent's SIP enabled PABX telephone systems as pleaded. 25 Although the respondent in its written submissions on its interlocutory application contended that the applicant's claim in the proceeding was speculative; that the applicant's prospects of success were, accordingly weak; and there was a strong prospect of the applicant being ordered to pay the respondent's costs of the proceeding, these propositions were not pressed. I indicated to the parties that on this application I would proceed on the basis that the applicant's case raised triable issues: see Appleglen Pty Ltd v Mainzeal Corporation Pty Ltd (1988) 79 ALR 634 and Equity Access Ltd v Westpac Banking Corp (1989) ATPR 40-972. 26 It is apparent from the pleadings that this matter involves a large number of detailed but disputed facts.

The evidence 27 In support of the respondent's application Mr David Andrew Hope, solicitor for the respondent, swore an affidavit filed on 23 April 2012. He set out, in some detail, his estimates as to the solicitor and client costs likely to be incurred by the respondent in the proceeding. He provided some detail of the tasks to be undertaken and the hourly or daily rates of solicitors and counsel. He then estimated that the costs of a mediation would be between $23,000 and $30,000. He referred to eight witnesses at an approximate average cost in legal fees of $10,000 per witness. He then referred to between $30,000 and $40,000 in relation to the trial. He estimated costs as between solicitor and client likely to be incurred by the respondent "to trial" will be at least $642,513. Based on those estimates Mr Hope stated his belief that if the respondent was successful in defending the proceeding it was not unreasonable to estimate that it would recover around $350,000 from the applicant by way of a costs order. 28 Mr Hope then gave evidence going to the applicant's inability to meet a costs order. He referred to a company search which included an indication that the applicant is a limited liability company with a paid-up capital of $600 comprising 600 shares of one dollar each and he referred to a fixed and floating charge registered in favour of Allianz Finance Pty Ltd for a maximum prospective liability of $18,750,000. 29 He then referred to real property searches and said that those searches had not identified any property in respect of which the applicant is the registered proprietor. This was later qualified. Mr Hope then referred to other current or recent litigation involving the applicant. There was one case in the Supreme Court of New South Wales (RSL Com Australia Pty Ltd), one in the Federal Court (Uganda Telecom) and two other cases, one involving Optus Mobile Pty Ltd and the other Optus Networks Pty Ltd. 30 As to proceedings between the applicant and the respondent, there is one proceeding in the Supreme Court of Victoria in which the respondent is suing the applicant for over $8 million for non-payment of services supplied to the applicant. The applicant has admitted indebtedness in the sum of $1,669,191.18 but denies liability to pay by reason of a counterclaim. The respondent has received costs orders in its favour including the costs of two interlocutory hearings and the costs of and occasioned by the amendments which Mr Hope said could be substantial as the counterclaim contains entirely new allegations. Mr Hope also referred to earlier and related Federal Court proceedings which included a costs order against the applicant in favour of the respondent. Mr Hope said the costs order was substantial and he expects the bill to exceed $100,000. No detail was given of this expectation. On objection, I admitted that evidence subject to weight. 31 Next Mr Hope referred to a document headed "ageing summary as of 30 April 2010" which showed among other things that the applicant had trade debtors of $10,886,069.52 as at 30 April 2010. More than half that amount had been owed for more than 90 days as at the date of the summary. 32 Mr Hope had looked at the applicant's website and said that from that website it appeared that the applicant was currently trading but he had not been able to locate any publicly available information about its financial position. He referred to the applicant's genuine steps statement dated 13 April 2012 to the effect that the applicant owes the respondent about $1.3 million for carriage services but has not paid that amount. He said that the respondent's total claim in the Victorian Supreme Court proceedings is for over $8 million plus costs and interest. 33 In the circumstances, Mr Hope deposed, the respondent considered that there was reason to believe that the applicant, if unsuccessful in its claim against the respondent, will be unable to meet an order for costs against it. On the basis of the available financial information concerning the applicant, the respondent submitted that it did not appear that the applicant will have sufficient assets to satisfy an order for costs made against it in this proceeding. 34 Mr Hope also annexed a copy of a letter dated 3 April 2012 which he sent to the solicitors for the applicant requesting that the applicant provide security for the respondent's costs of this proceeding. He also annexed a letter in response he received later the same day. 35 The questions asked and answers given in that correspondence were as follows: The applicant has a paid-up capital of $600 This is correct. There is a fixed and floating charge registered in favour of Allianz Finance Pty Ltd for a maximum prospective liability of $18,750,000. This is a facility, and currently has not been drawn down to anything like its limit. Our client undertakes to notify you in the event that it is drawn down beyond $18 million. If necessary our client would give this undertaking to the court. We have conducted property searches which confirmed that the applicant is not the registered proprietor of any real property in Victoria, Queensland, New South Wales and Western Australia. We are currently awaiting a response for property searches in Tasmania, ACT, Northern Territory and South Australia. This is incorrect. The applicant does own real estate, and suggests that your enquiries have been less than careful. In the Victorian Supreme Court proceedings in which the respondent is the plaintiff, the applicant has admitted indebtedness to the respondent in the sum of $1,669,191.18 but has failed to pay this amount. You conveniently omit from your assertion that the applicant has admitted in the Victorian Supreme Court proceedings an indebtedness of $1,669,191.18 the applicant has with the leave of the court filed a counterclaim in which it asserts that by reason of a breach of contract the respondent has caused damage to the applicant in the sum of $2,606,253.25 We note that recent decisions contained on AUSTLII indicate that the applicant is alleged to owe a significant amount of money to other companies who have also had to resort to litigation to compel payment. Both cases have been resolved and the applicant has been released of any obligations. The applicant's change of practitioner in both the Victorian Supreme Court proceedings in the Federal Court proceedings remains unexplained It is no business of the respondent the reason that the applicant changed solicitors, nor is it relevant to security for costs. The respondent considers that there is reason to believe that the applicant, if unsuccessful in its claim against the respondent, will be unable to meet an order for costs against it The applicant is able to meet an order for costs against it in excess of $350,000. We estimate that the hearing will occupy between 10 to 12 days. We do not accept that the hearing will occupy 10 to 12 days. We estimate that the respondent's party party costs will be well in excess of $350,000 at the completion of the trial We do not accept that the party-party costs of the respondent will exceed $350,000 at the completion of the trial. We request that you indicate what security the applicant will provide to the respondent for its costs of $350,000 up to and including the trial. The applicant will not provide security unless it is ordered to do so.

36 It may be seen from this correspondence that the applicant has chosen not to supply detailed information as to the applicant's financial position, although undoubtedly that information would be readily available to it. Rather, the applicant in resisting this interlocutory application has relied on the lack of information as to the applicant's financial position available to the respondent. 37 There was also an affidavit affirmed on 30 April 2012 by Sara Laura Delpopolo, the solicitor acting for the applicant in the proceeding. She deposed that the applicant is the registered proprietor of Suite 24, 809 to 811 Pacific Highway, Chatswood. She annexed a transfer dated 11 March 2003 which includes a reference to the transferor acknowledging receipt of the consideration of $605,000. Ms Delpopolo also annexed an Internet banking statement dated 30 April 2012 showing a current balance of "$471,673.81-" and funds available of "$9.19+". According to the ASIC current company extract for the applicant, the address in Chatswood is its principal place of business. 38 Ms Delpopolo also referred to the other litigation. She annexed an amended defence and counterclaim in proceedings in the Victorian Supreme Court for which leave to file was granted on 23 March 2012. She also annexed a copy of the orders made by consent in the Uganda Telecom proceedings dated 12 August 2011 and a copy of the orders made by consent in the RSL Com Australia Pty Ltd proceedings dated 24 November 2011. Ms Delpopolo referred to the proceedings between the applicant and Optus Networks Pty Ltd in which the applicant alleges it is owed approximately $1,100,000 and Optus has cross-claimed that it is owed $5,300,000. Ms Delpopolo also referred to the proceedings in which Optus Mobile Pty Ltd is suing the applicant for $2,500,000. The applicant denies the allegation and has filed a cross-claim in the amount of approximately $1,700,000.

Consideration 39 The applicant adduced no evidence to qualify the respondent's estimates but criticised them for lack of sufficient specificity. The applicant submitted, in reliance on T Sloyan and Sons (Builders) Ltd v Brothers of Christian Instruction [1974] 3 All ER 715 at 720 per Lane J, that Mr Hope's affidavit was nothing like the skeleton bill of costs referred to in that case and the affidavit gave no opportunity to the Court or the applicant to identify the reasonableness of the amounts claimed. The applicant submitted that a skeleton bill of costs was the way it should be done. But I would not derive any assistance in a matter of practice and procedure such as this from what may have been the practice in England nearly 40 years ago. 40 I say "may have been the practice" because the report discloses that the passage relied on from the judgment of Lane J was a reference as follows: In the White Book [Supreme Court Practice 1973, vol 1, p 385, para 23/1-3/22] a note to RSC Ord 23 under the heading 'Amount of Security' begins in this way: 'The amount of security awarded is in the discretion of the Court, which will fix such sum as it thinks just, having regard to all the circumstances of the case. It is not the practice to order security on a full indemnity basis. The more conventional approach is to fix the sum at about two-thirds of the estimated party and party costs up to the stage of the proceedings for which security is ordered; but there is no hard-and-fast rule. It is a great convenience to the Court to be informed what are the estimated costs, and for this purpose a skeleton bill of costs usually affords a ready guide.' I may remark that no such ready guide was available to the registrar or to myself. It appears that no such reference is included in the current edition of the White Book. I also note that Lane J went on to say that no doubt there were many cases where the court was able to arrive at a reasonably accurate figure of what a defendant's costs should be and then, if the usual practice were followed, order security for two-thirds of that amount. The problem with that approach in the case at hand was that there were no proven or accepted figures before the court as to what the relevant parties' costs would have been if they had confined themselves to their costs of defeating the builders' claim. 41 The practice of the Federal Court has not been to require a skeleton bill of (future) costs as a pre-requisite to the exercise of the discretion to order security for costs, although in certain circumstances such a skeleton bill is regarded as useful: see Ciappina v Ciappina [1983] FCA 95; (1983) 70 FLR 287 at 291, Dranichnikov v Centrelink [2002] FCA 1622, Channel Island Seafood Pty Ltd v Bryjed Pty Ltd [2002] FCA 983 at [19]-[20], Lisa Joy Pty Ltd v Brothers Neilsen International Pty Ltd [2003] FCA 986 at [8] and SZLZH v Minister for Immigration and Citizenship [2008] FCA 1163 at [11]. 42 In this case there is enough detail and I accept Mr Hope's figures but as general estimates. This is consistent with the broad brush approach referred to by Emmett J in Save The Ridge Inc v Commonwealth of Australia [2004] FCA 1289 at [24] and accepting that the best evidence is not required, as indicated by Davies J in Pathway Investments Pty Ltd v National Australia Bank Limited [2012] VSC 97 at [38]. 43 Turning to the ability to pay, I do not place reliance on the sums claimed in the other proceedings which are on foot. This seems to be an industry where very large monetary sums are the subject of litigation. However there are five important facts which point to the conclusion that there is reason to believe that the applicant will be unable to pay the costs of the respondent if so ordered. 44 First, the applicant is a limited liability company with a paid up capital of $600. 45 Second, the applicant has admitted that it owes the respondent $1,335,235.40 which it has not paid. This figure is calculated from the sum of $1,669,191.18 the applicant has admitted in the Supreme Court of Victoria proceedings that it owes the respondent less an amount of $333,955.78 it paid in April 2011. I note this is subject to a counterclaim but I am not able to assess the worth of that claim. 46 Third, I take into account that the only bank document which is in evidence, relating to the applicant's business loan account with Westpac as at 30 April 2012, shows funds available of $9.19. 47 Fourth, the applicant has been ordered to pay to the respondent substantial although untaxed costs in the current proceedings in the Supreme Court of Victoria and in the earlier and related Federal Court proceedings. 48 Fifth, there is a fixed and floating charge registered in favour of Allianz Finance Pty Ltd for a maximum prospective liability of $18,750,000 but no other evidence of the applicant's financial capacity. 49 I conclude that there is a reasonable belief that the applicant will be unable to pay the costs of the respondent if so ordered. I do so in the absence of any detailed information as to the applicant's circumstances. I have assumed that that information was or would have been readily available to the applicant but that it has chosen not to deploy it on this interlocutory application. Indeed the applicant's evidence on this interlocutory application was limited to a solicitor's affidavit. 50 I do not accept the applicant's submission that the evidentiary burden had not shifted to the applicant. Also I do not accept the submission that I should infer that the applicant has a substantial equity in its business premises which would be available to pay the costs of the respondent if so ordered. In that regard the evidence is no more than receipt by the transferor of the consideration of $605,000 in 2003 and a related business loan with a current balance of "$471,673.81-" There is also the fixed and floating charge. 51 It was suggested by the applicant that the respondent delayed in bringing its application for security and for that reason an order should not be made. I reject that submission. The proceedings were filed on 1 March 2012, there was correspondence dated 3 April 2012 by the solicitors for the respondent requesting that the applicant provide security for costs and the interlocutory application was filed on 19 April 2012 in accordance with orders I made at a directions hearing on 4 April 2012. The respondent's defence was filed on 30 April 2012. 52 The applicant also submitted that an undertaking to notify the respondent if the fixed and floating charge registered in favour of Allianz Finance Pty Ltd for a maximum prospective liability of $18,750,000 was drawn down beyond $18 million showed that an order for security for costs should not be made. In my opinion this is a matter of little weight. First, the undertaking offered relates only to giving notice. Second, by itself and in the absence of further relevant detail an apparent capacity further to borrow does not forestall or displace the reasonable belief that the applicant will be unable to pay the costs of the respondent if so ordered. 53 I therefore order that the applicant provide security in the amount of $140,000 but with liberty to the respondent to apply to increase that amount. In my opinion this is a reasonable discounted estimate of recoverable costs in relation to the first stages of litigation such as this, involving wide ranging and detailed disputes of fact. I indicate that this figure is referable to the estimates of costs up to and including any mediation but that indication should not be taken to prescribe the time at which the respondent may apply to increase the amount of security. The outcome of any such application will depend on the circumstances at that time. 54 The orders I make are as follows: 1. The applicant provide security for the respondent's costs of and incidental to the proceeding in the sum of $140,000 in the form of a bank guarantee from an Australian trading bank (or in such other form as the Court deems fit) to be lodged with the Court in a form satisfactory to the Registrar and a copy of which be served on the solicitors for the respondent. 2. The bank guarantee required by order 1 be lodged with the Court by 1 June 2012. 3. The proceeding be stayed if security for the respondent's costs is not provided in accordance with the order of the Court. 4. The respondent has liberty to apply, on seven (7) days' notice, to vary the amount of security for costs required to be provided in accordance with the order of the Court. 5. The applicant pay the respondent's costs of the respondent's interlocutory application filed on 19 April 2012. I certify that the preceding fifty four (54) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Robertson.