Palm Springs Limited v Darling

Federal Court of Australia (Full Court)|2002-08-23|Before: Tamberlin J, Dowsett JJ

REASONS FOR JUDGMENT 1 The applicant, Palm Springs Ltd ("Palm Springs"), seeks leave to appeal from an order of a judge of this Court which summarily dismissed its proceeding against the respondent Mark Harold Darling ("Mr Darling"), on the ground that it was an abuse of process. 2 At the time the present proceeding commenced there were already in existence two proceedings in New South Wales jurisdictions brought by Mr Darling against Palm Springs. The first was a proceeding in the Industrial Relations Commission of New South Wales ("IRC") in relation to the termination of his employment with Palm Springs and his appointment as a director of Palm Springs ("the IRC proceeding"). The second was in the Equity Division of the New South Wales Supreme Court seeking rectification of a sale agreement in which Mr Darling sold to Palm Springs shares in his company Fountainhead Pty Ltd ("Fountainhead") ("the Equity Division proceeding"). 3 In the present proceeding, N1396 of 2001 ("the Federal Court proceeding"), Palm Springs seeks against Mr Darling relief under the Trade Practices Act 1974 (Cth), alleging misleading and deceptive conduct in connection with the sale of Fountainhead to Palm Springs and contravention of the Corporations Act 2001 (Cth) in connection with his conduct as a director of Palm Springs. 4 His Honour held that the Federal Court proceeding was an abuse of process because the predominant purpose of Palm Springs was not to have the proceeding decided by the Federal Court but rather to use that proceeding as a means of consolidating the IRC proceeding, the Equity Division proceeding and the Federal Court proceeding in the one forum, namely the Supreme Court of New South Wales. His Honour said (at [34]) that the Federal Court "… was not designed to serve as a jurisdictional transit point to facilitate transfer so as to enable a resolution of issues in a state court under State legislation."

DISPUTES BETWEEN THE PARTIES 6 Palm Springs is a supplier of bottled water. In November 2000 Palm Springs proposed that it acquire Mr Darling's company Fountainhead. In the course of discussions, Mr Darling told Palm Springs that he had been negotiating on behalf of Fountainhead with another water company called Lithgow Valley Springs Aust Pty Ltd ("Lithgow Valley") for the acquisition of part of the business of that company. According to Palm Springs, it was agreed that Mr Darling would continue to negotiate with the proprietors of Lithgow Valley, but on behalf of Palm Springs, and the acquisition of the relevant part of Lithgow Valley's business would eventuate at the same time as the planned acquisition by Palm Springs of Fountainhead and two other companies in the water business. The preferable consideration for the Lithgow Valley business was to be three million to four million shares in Palm Springs rather than cash but as a fall back position, cash up to $1.1 million. Palm Springs says that Mr Darling went ahead but arranged the purchase of the Lithgow Valley business on behalf of Fountainhead rather than Palm Springs and for cash rather than shares and without telling the Lithgow Valley vendors that shares was a possible consideration. Further, the purchase negotiated by Mr Darling was in respect of fewer customer runs than he had represented to Palm Springs. 7 On 20 February 2001 the parties entered into an agreement for the acquisition by Palm Springs of Mr Darling's shares in Fountainhead. This transaction was completed on 26 March 2001 and Mr Darling was then appointed a director and Deputy Chief Executive Officer of Palm Springs. 8 Disputes arose over what Palm Springs claims was the unauthorised use by Mr Darling of funds of Palm Springs' now wholly owned subsidiary, Fountainhead, for personal purposes, such as lease payments on a motor vehicle. On 18 May 2001 Palm Springs terminated Mr Darling's employment and, on 12 June 2001, he ceased to be a director of Palm Springs.

LITIGATION 9 In the meantime, on 7 June 2001, Mr Darling commenced the IRC proceeding. In his summons for relief Mr Darling alleges that the termination of his employment was unreasonable and made without reasonable grounds and that he was thus unfairly dismissed. Further he alleges that his employment agreement was unfair, harsh and unreasonable, specifically because it fixed his remuneration at $120,000 per annum which was unfair and less than a person performing the work would receive as an employee at the same level of responsibility. He claims $1,457,353.34 based on an annual salary of $275,000 for five years and annual director's fees of $25,000, less amounts already received. 10 By its reply dated 26 October 2001 Palm Springs gives, as the reason for the termination of Mr Darling's employment and his removal as a director, its complaint about his purchase of the Lithgow Valley business on behalf of Fountainhead, instead of on behalf of Palm Springs, and the use of Fountainhead's assets for personal purposes. It states that it will rely on the matters set out in the statement of claim in the Federal Court proceeding. Thus, while Palm Springs denies Mr Darling's IRC claim, to the extent that he succeeds, Palm Springs will seek to reduce the amount of any award by the amounts it says it has lost as a result of the conduct complained of in the Federal Court proceeding. 11 On 11 July 2001 Mr Darling commenced the Equity Division proceeding seeking rectification of the sale agreement of 20 February 2001 on the basis of an alleged mistake in recording the number of shares to be issued. He claims the number should have been 19,950,000 instead of 19,500,000. Palm Springs disputes this claim. 12 On 5 October 2001 Palm Springs commenced two sets of proceedings. The first was the Federal Court proceeding. In the application Palm Springs seeks orders under ss 82 and 87 of the Trade Practices Act 1974 (Cth) ("the Trade Practices Act") for declarations of contravention and compensation orders under s 1317E and 1317H of the Corporations Law (sic - should be Corporations Act 2001 (Cth)) and for declarations and orders under ss 21 and 23 of the Federal Court of Australia Act 1976 (Cth) ("the Federal Court Act"),rising from: · alleged misleading or deceptive conduct in contravention of s 52 of the Trade Practices Act, from alleged conduct amounting to a failure to act in good faith; · alleged conduct amounting to the use of a director's position to gain advantage for himself and to cause disadvantage to the corporation, alleged breach of fiduciary duty; and · alleged breach of contract and warranty and alleged misuse of confidential information. ] The legislative basis of the Federal Court's jurisdiction to hear the application and grant the relief sought is asserted to be s 86 of the Trade Practices Act, section 131(8) of the Corporations Law (sic) and ss 21 and 32 of the Federal Court Act. 13 A statement of claim filed at the same time pleads causes of action relating to Palm Springs' complaint about the acquisition of the Lithgow Valley business and misuse of Fountainhead's funds. 14 The second proceeding, commenced by Palm Springs on 5 October, was a proceeding in the New South Wales Supreme Court no 4908 of 2001 which seeks orders that the IRC proceeding be removed to the New South Wales Supreme Court and that that proceeding be consolidated with the Equity Division proceeding and that the latter proceeding be stayed pending orders by the Federal Court to remove the Federal Court proceeding to the New South Wales Supreme Court.

PALM SPRINGS' STRATEGY 15 Palm Springs has the understandable wish to have all its litigation with Mr Darling heard in the one forum. An obstacle to this is that the jurisdiction of the IRC is exclusive: see Industrial Relations Act 1996 (NSW), Pt 9. However, s 8 of the Jurisidiction of Courts (Cross-Vesting) Act 1987 (NSW) provides as follows: "8 (1) Where:

(a) a proceeding (in this subsection referred to as the 'relevant proceeding') is pending in:

(i) a court, other than the Supreme Court, of the State; or

(ii) a tribunal established by or under an Act; and (b) it appears to the Supreme Court that:

(i) the relevant proceeding arises out of, or is related to, another proceeding pending in the Federal Court, the Family Court or the Supreme Court of another State or of a Territory and, if an order is made under this subsection in relation to the relevant proceeding, there would be grounds on which that other proceeding could be transferred to the Supreme Court; or

(ii) an order should be made under this subsection in relation to the relevant proceeding so that consideration can be given to whether the relevant proceeding should be transferred to another court,

the Supreme Court may, on the application of a party to the relevant proceeding or of its own motion, make an order removing the relevant proceeding to the Supreme Court." 16 According to Palm Springs, the IRC proceeding is a "relevant proceeding" and it is "related to another proceeding pending in the Federal Court", namely the present Federal Court proceeding. On this basis, Palm Springs proposes to seek an order from the Supreme Court removing the IRC proceeding into that Court. Palm Springs would then apply to the Federal Court for an order cross-vesting the Federal Court proceeding to the Supreme Court. Jurisdiction for such an order is conferred by s 5(4) of the Jurisdiction of Court (Cross-Vesting) Act 1987 (Cth) which is as follows: "(4) Where:

(a) a proceeding (in this subsection referred to as the 'relevant proceeding') is pending in the Federal Court or the Family Court (in this subsection referred to as the 'first court'); and

(i) the relevant proceeding arises out of, or is related to, another proceeding pending in the Supreme Court of a State or Territory and it is more appropriate that the relevant proceeding be determined by that Supreme Court;

(A) whether, in the opinion of that first court, apart from this Act and any law of a State relating to cross-vesting or jurisdiction, the relevant proceeding or a substantial part of the relevant proceeding would have been incapable of being instituted in the first court and capable of being instituted in the Supreme Court of a State or Territory;

(B) the extent to which, in the opinion of the first court, the matters for determination in the relevant proceeding are matters arising under or involving questions as to the application, interpretation or validity of a law of the State or Territory referred to in sub-paragraph (A) and not within the jurisdiction of the first court apart from this Act and any law of a State relating to cross-vesting or jurisdiction; and

it is more appropriate that the relevant proceeding be determined by that Supreme Court; or

(iii) it is otherwise in the interests of justice that the relevant proceeding be determined by the Supreme Court of a State or Territory;

the first court shall transfer the relevant proceeding to that Supreme Court." (Emphasis in original) 17 On 12 November 2001 Mr Darling filed, in the Federal Court, a notice of motion seeking an order that the proceeding be dismissed generally, or in part, under O 29 r 2 of the Federal Court Rules.

REASONS OF PRIMARY JUDGE 18 His Honour first dealt with Mr Darling's contention that the claims made in the Federal Court proceeding were colourable and not genuine, in the sense that they were fabricated for the purpose of establishing jurisdiction: Burgundy Royale Investments Pty Ltd v Westpac Banking Corporation (1987) 18 FCR 212 at 219, The Bell Group Ltd v Westpac Banking Corporation (2000) 104 FCR 305 at 328. 19 His Honour (at [21]) considered that the formulations of claims as pleaded in the statement of claim were "unsatisfactory but are not such that they lack foundation". Possibly amendment to the pleading may be required but the defects were not such as to call for foreclosure of the right of Palm Springs to pursue those matters. There had been no interlocutory process and, in his Honour's words, "The material presently before the Court provides an inadequate basis on which to make any definitive determination as to the merits of the matter and there are many aspects of the case which call for further investigation" 20 His Honour considered that it was not appropriate to conclude that there was no factual or legal foundation for any of the matters raised. 21 However, his Honour (at [22]) found that the proceeding had been instituted in the Federal Court for an "ulterior and collateral purpose outside theFederal Court of Australia Act 1976(Cth)". His Honour said that it had "… been frankly conceded that the commencement of the proceedings in this Court is to procure a situation whereby all issues will be heard together in the Supreme Court and the initiation and transfer of the Federal Court proceedings is an essential step in securing this result." 22 His Honour referred to the decision of the High Court in Williams v Spautz (1992) 174 CLR 509 and a passage in the judgmentof the majority (Mason CJ, Dawson, Toohey and McHugh JJ) at 522: "In our view, the power must extend to the prevention of an abuse of process resulting in oppression, even if the moving party has a prima facie case or must be assumed to have a prima facie case. Take, for example, a situation in which the moving party commences criminal proceedings. He or she can establish a prima facie case against the defendant but has no intention of prosecuting the proceedings to a conclusion because he or she wishes to use them only as a means of extorting a pecuniary benefit from the defendant. It would be extraordinary if the court lacked power to prevent the abuse of process in these circumstances.'" (Emphasis added by his Honour) 23 His Honour also noted that the statement of the majority (at 526) that an abuse of process may occur "… when the purpose of bringing the proceedings is not to prosecute them to a conclusion but to use them as a means of obtaining some advantage for which they are not designed or some collateral advantage beyond what the law offers." 24 His Honour then said: "27. For Palm Springs it is said that there is no abuse of process because it seeks to obtain the relief sought in relation to its claims. It prefers to have them disposed of in the Supreme Court where all issues in the three jurisdictions can be resolved together. It also submits that if any transfer motion is eventually made, and refused, then it will litigate all federal and state claims in the Federal Court proceedings (with the exception of the IRC claims) to a final determination. In addition, it submits that the approach taken is open in law to it and is contemplated by legislation so that it can be said to be taking an advantage that the law offers, namely, the invocation of federal jurisdiction to enable the transfer of IRC proceedings to the Supreme Court. 28. While these submissions have some force, I consider that the material before me is sufficient to warrant the conclusion that the objective, predominant intention of Palm Springs is to use the Federal Court for a purpose other than exercise of the jurisdiction for which the Federal Court was established. 29. In this case, the predominant purpose objectively determined of Palm Springs is not to have the proceedings decided by the Federal Court in the exercise of the judicial power of the Commonwealth, but rather to use the Federal Court proceedings as a means to consolidating all proceedings both state and federal into one combined hearing in the Supreme Court. The question is essentially one of characterisation but, in my view, such use of this Court is one for which the Court's jurisdiction was never designed and is a use of the proceedings for a collateral or ulterior purpose foreign to the jurisdiction conferred. 30. It was always envisaged in this case that federal jurisdiction was to be invoked, not to exercise the judicial power of the Commonwealth or to vindicate the rights and obligations of the parties, but to enable cross-vesting under state legislation from a court other than the Supreme Court into the Supreme Court." 25 After referring to some New South Wales decisions his Honour said: "34. The Federal Court was established to exercise the judicial power of the Commonwealth in relation to matters properly before it in order to determine the claims and vindicate the rights and obligations of the parties by a binding and enforceable decision. It was not designed to serve as a jurisdictional transit point to facilitate transfer so as to enable a resolution of issues in a state court under state legislation."

CONCLUSION 26 There can be no doubt, and Palm Springs has frankly conceded from the outset of theFederal Court proceeding, that its intention is to seek to have the Federal Court proceeding cross-vested to the Supreme Court. It is equally clear however, and his Honour in the passage at [27] obviously accepted, that Palm Springs could not itself determine whether or not the Federal Court would make a cross-vesting order. If such an order were to be refused, Palm Springs' intention, as accepted by his Honour, is to pursue its claim to conclusion in the Federal Court. 27 We do not consider that any abuse of process was, or is, involved. What Palm Springs seeks is relief under the Trade Practices Act and the Corporations Act. If its cross-vesting application succeeds it will seek that relief in the Supreme Court, in the same proceeding. That proceeding will have been lawfully submitted to the jurisdiction of the Supreme Court pursuant to the Commonwealth Cross-Vesting Act. So what Palm Springs hopes to achieve is the very relief the Trade Practices Act and the Corporations Act hold out. The present case is a world away from the kind of collateral benefit that Dr Spautz sought: the acquiescence of defendants to demands which had no connection with his criminal defamation action. Palm Springs is not seeking an object "beyond that which the legal process offers": Williams v Spautz at 523. Seeking one forum in which all issues could be tried is a legitimate advantage for Palm Springs, indeed, as we shall later observe, for both parties: The Bell Group (in liquidation) v Westpac Banking Corporation (1996) 20 ACSR 762 at 774 per RD Nicholson J. 28 Thus, the most that can be said is that the Federal Court proceeding was commenced in this Court, rather than in the Supreme Court, because of the forensic advantage that was perceived to be available under the cross-vesting legislation. There is no basis in the material before the primary judge to conclude, and his Honour did not conclude, that the predominant purpose for commencing the Federal Court proceeding, claiming the relief set out in the application, was other than to obtain that relief. There is no reason to conclude that the claims for relief would not be prosecuted to finality in the Federal Court, if an application for transfer under the cross-vesting legislation is refused, or in the Supreme Court, if such an application is granted. 29 In Bankinvest AG v Seabrook (1988) 14 NSWLR 711 at 725 Rogers AJA said: "It is important that full effect be given by the courts to the imaginative and detailed code for ensuring that throughout Australia, disputes are dealt with by the one court and that be the court most appropriate for the particular dispute. Consistently with the preservation of dual State and Federal Court systems and with the State Courts dispensing justice within the State boundaries in appropriate cases, no longer is it appropriate to view the court of another State as a foreign court." 30 The cross-vesting scheme, in its Federal to State and State to State aspects, remains fully operative and, to that extent, the observations of Rogers AJA, with which we agree, are still applicable. To have all disputes between a set of litigants resolved in the one Australian court which is the most appropriate is a legitimate, indeed self-evidently desirable, objective. If, as in the circumstances of the present case, that involves the Federal Court becoming a "jurisdictional transit point", we do not see that as in any way derogating from the dignity of the Court. The Federal Court will only make a cross-vesting order if, inter alia, it is satisfied that the interests of justice will be served. Determining whether the interests of justice are served by the making of an order for which a Commonwealth Act confers express jurisdiction seems to us to be not remote from the judicial function. 31 If Mr Darling's argument is correct, s 5(4) of the Commonwealth Cross-Vesting Act has a severely limited field of operation, at least insofar as applicants are concerned. Applicants seeking cross-vesting orders would need to show that the idea only occurred to them after their proceeding was instituted. To the extent they had cross-vesting in mind when they commenced the proceeding, they would be at risk of having it struck out as an abuse of process before any cross-vesting order could be obtained. 32 In any case, where litigants institute genuine claims with the hope or expectation that they will not proceed to judgment that, in itself, does not mean there is an abuse of process. Many claims are instituted in the hope, often reasonably based, that a settlement will be reached, but in the realisation that, in the absence of settlement, the matter will have to proceed to trial and final determination. 33 Some of the New South Wales decisions referred to by his Honour, together with a number of others, are reviewed by Einstein J in Resarta Pty Ltd v Finemore [2002] NSWSC 75. These decisions consider whether the New South Wales Supreme Court has jurisdiction under s 8 of the New South Wales Cross-Vesting Act to remove proceedings from the IRC to the Supreme Court. It seems the view currently prevailing accepts that there is such jurisdiction although, of course, its exercise will vary depending on the circumstances of each case. Einstein J, however, acceded to an application that the question should be removed to the Court of Appeal. To the best of our information no decision has yet been given by that Court. 34 But this question is obviously a matter for the courts of New South Wales. Whether or not Palm Springs is likely to be successful in having the IRC proceeding removed into the Supreme Court is not an enquiry on to which we need to, or should, embark. 35 Mr Darling sought to raise, by way of notice of contention, the arguments advanced below that the Palm Springs claim was colourable. These arguments raised detailed factual assertions and questions of law, such as whether the director of a company owes fiduciary duties in respect of dealings with the assets of a wholly owned subsidiary and what is the necessary pleading of reliance in relation to the Trade Practices Act claims. We do not see that his Honour erred in exercising his discretion in rejecting the application insofar as it proceeded on this basis, having regard to its prematurity. 36 It follows that, in our view, his Honour was in error in holding that there was an abuse of process. Substantial injustice would be caused to Palm Springs because that error would lead to the dismissal of its claim in the Federal Court proceeding. Indeed it was not suggested that if Palm Springs succeeded in its substantive claim that it would nevertheless be inappropriate to grant leave. 37 Accordingly leave to appeal will be granted and the appeal allowed with costs. There will be an order that Mr Darling pay Palm Springs' costs of the appeal and of the strike-out motion. 38 Before leaving this case we would observe that the approach of Mr Darling's advisers seems designed to have overlapping proceedings raising complex legal and factual issues, including credibility issues, conducted in at least two, and possibly three, different forums with the consequent delay, cost, confusion, risk of conflicting findings and all the other evils that such a course necessarily involves. How this could be in the interests of justice or the parties, including Mr Darling himself, escapes us. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court.

Counsel for the Appellant G J Hatcher with M Painter

Counsel for the Respondent: T Jucovic QC with M Watts

Solicitor for the Respondent: Colin Biggers & Paisley

Jurisidiction of Courts (Cross-Vesting) Act 1987(NSW)s 8

Jurisdiction of Court (Cross-Vesting) Act 1987(Cth)s 5(4)

Trade Practices Act 1974(Cth)

Court of Australia Act 1976(Cth)

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