Plaintiff v Defendant

1 This is an appeal from a decision of an Associate Justice dismissing an application by the defendant ("TCL") for an order under r 7.05 of the Supreme Court (General Civil Procedure) Rules 2005 (Vic) ("SCR") setting aside service of a Writ and Amended Statement of Claim ("the Claim") in which it is sued by the plaintiff ("Castel") for breach of contract.

2 Castel is an Australian company and TCL is a Chinese company. Between 2003 to mid-2008, Castel was the Australian distributor of air-conditioning products made by TCL and purchased air-conditioning products from TCL for resale in Australia. In the Claim, Castel has alleged that certain sales contracts under which TCL supplied Castel with air-conditioning products for resale in Australia were breached by TCL in that TCL failed to ship products within stipulated times and supplied products that did not meet contractual specifications. Castel seeks damages for breach of contract and has also claimed an entitlement to the refund of an amount of $4,514 overpaid on stock.

3 Castel served the Claim on TCL in China. The indorsement on the Claim in compliance with r 7.02 of the SCR specified that Castel relied on the jurisdictional bases described in r 7.01(f)(i) of the SCR (a contract made in Victoria), r 7.01(f)(iii) of the SCR (a contract governed by the law of Victoria) and r 7.01(g) of the SCR (a breach of contract committed in Victoria) to support service on TCL out of Australia.[1]

4 TCL filed a conditional appearance to the Writ and brought an application under

r 7.05 of the SCR[2] to set aside service on the ground that the sales contracts upon which Castel sues were not of the kind described in rr 7.01(f) and 7.01(g), in that the sales contracts were made in China and governed by the law of China and that if there was a breach, the breach was committed in China. It was thus put that service was not authorised by r 7.01.

5 The Associate Justice held that service out of Australia was justified under

rr 7.01(f)(i) and (iii), though not under r 7.01(g). As the appeal was filed before amendments to r 77.06 of the SCR came into effect on 1 January 2013,[3] the appeal proceeds as a rehearing de novo.

6 The appeal has raised an important issue of principle: namely, whether a plaintiff, on an application by a foreign defendant under r 7.05 of the SCR to set aside service of an originating process on the ground that service outside of Australia was not authorised by r 7.01 of the SCR, must show a "strongly arguable case" that the jurisdictional facts supporting service out of Australia under r 7.01 exist,[4] or whether it is sufficient for a plaintiff to show that according to the pleaded allegations, the claim is of a kind that falls within r 7.01.

7 Castel argued that it only had to show that the allegations in the Claim were of a kind to fall within r 7.01, not that there was a strong arguable case on the merits for establishing jurisdictional nexus. Castel relied on the plurality decision of the High Court in Agar v Hyde[5] which considered the rules for service out of Australia contained in Part 10 of the Supreme Court Rules 1970 (NSW) ("the NSW Rules").

8 In Agar v Hyde, the plurality[6] held that the New South Wales Court of Appeal wrongly approached the question of whether the plaintiff[7] had established the jurisdictional nexus required under Pt 10 r 1A, the New South Wales counterpart to Victoria's r 7.01, in respect of a negligence claim against foreign defendants by considering whether the material before the Court justified the conclusion that there was a "strong arguable case" for the existence of the duty of care alleged to be owed, as an element of the claim in tort on which the jurisdictional nexus depended. The plurality held that whether any of the categories of jurisdictional nexus in Pt 10 r 1A were engaged depended on the way in which the plaintiff's claim was framed and concluded that the requisite jurisdictional nexus was established by reason that the claims were framed in negligence and alleged that tortious acts or omissions caused the damage which the plaintiff suffered when injured in New South Wales.

9 The reasoning of the plurality depended on the particular rules in New South Wales. Central to their reasoning was that the NSW Rules had been amended. Before amendment, a plaintiff seeking leave to proceed had to "satisfy" the Court that the plaintiff had a "prima facie case for the relief sought".[8] But the rules as amended simply stated that "the plaintiff shall not proceed against [a defendant served outside Australia who has not entered an appearance] except with the leave of the Court".[9]

10 The plurality stated that the starting point must be the rules themselves and that the learning that has developed in connection with other rules cannot automatically be applied to the rules in question.[10] The plurality noted that the rules under consideration did not require leave to serve out of the jurisdiction and did not require that the parties seeking to serve out of the jurisdiction demonstrate a prima facie entitlement to the relief sought in the originating process:

All that the applicable Rules say is that "the plaintiff shall not proceed against [a defendant served outside Australia who has not entered appearance] except with the leave of the Court". The applicable Rules are silent about what matters can or should be taken into account in granting or refusing that leave.[11]

In deciding whether Pt 10, r 1A applied, and thus permitted service outside Australia of the originating process in these two actions, attention must be directed to the way in which the claims made by the respondents are framed. The paragraphs speak of "proceedings [which] are founded on" a specified matter such as a cause of action arising in the State or a tort committed in the State. That focuses attention upon the nature of the claim which is made. That is, is the claim a claim in which the plaintiff alleges that he has a cause of action which, according to those allegations, is a cause of action arising in the State?

The inquiry just described neither requires nor permits an assessment of the strength (in the sense of the likelihood of success) of the plaintiff's claim. The Court of Appeal was wrong to make such an assessment in deciding whether the Rules permitted service out ... The application of these paragraphs of r 1A depends on the nature of the allegations which the plaintiff makes, not on whether those allegations will be made good at trial...[12]

The plurality stated that the merits of the claim only fall for consideration, as a discretionary factor, if service was authorised by the NSW Rules and the Court was not persuaded that it was an inappropriate forum for the trial of the proceedings. The plurality considered that the test applied in an application for summary judgment by a defendant served locally should also be applied in deciding whether an originating process served outside Australia makes claims which have such poor prospects of success that the proceeding should not go to trial.[13]

11 In a separate judgment, Gleeson CJ found no error in the approach of the Court of Appeal. Gleeson CJ stated that the Court of Appeal had stressed that when considering, on an application for leave to proceed under Part 10, whether there is a good arguable case the test is to be related to the jurisdictional nexus required by

Pt 10 r 1A, not the merits of the claim for relief.[14] Gleeson CJ went on to state that it did not matter whether the rubric of Pt 10 r 2 (application for leave to proceed) or

Pt 10 r 6A (application to set aside service) was invoked in that case, on the basis that the plaintiffs should not be permitted to proceed with their claims if their actions could not succeed.[15] Callinan J likewise considered that the standard to be met was one of a "strong argument for the opinion" that the jurisdictional nexus was established.[16]

12 The approach of the plurality in Agar v Hyde has not been followed in the Victorian context. Castel's argument does, however, find support in Puccini Festival Australia Pty Ltd v Nippon Express (Australia) Pty Ltd,[17] a decision of a single judge of this Court. In that case, Cavanough J, in obiter, doubted the correctness of the test applied by the Victorian Court of Appeal in Schib Packaging Srl v Emrich Industries Pty Ltd[18] in view of the plurality judgment of the High Court in Agar v Hyde. In Schib, the Court of Appeal proceeded on the basis that the plaintiff must show a strong arguable case that the relevant conditions of r 7.01 have been satisfied,[19] citing W.A. Dewhurst & Co Pty Ltd v Cawrse[20] and Williams v The Society of Lloyd's[21] as authority. Both cases are long-standing authority in this State that it is for the plaintiff, on an application to set aside service outside Australia on the ground that service was not authorised by r 7.01, to show that there is a strong argument for the opinion that the claim sued upon has the jurisdictional nexus required by r 7.01. No reference was made to Agar v Hyde in Schib, even though Schib post-dates Agar v Hyde.

13 In Puccini Festival, Cavanough J considered that Schib could not be reconciled with Agar v Hyde if, as His Honour thought, there was no relevant distinction between

r 7.01 and the corresponding provisions of Part 10 of the NSW Rules. Cavanough J considered that the observations of the plurality:

... would seem to establish that, on an application to set aside service out of the jurisdiction, it is for the plaintiff to show, merely, that according to the allegations made, the plaintiff's proceeding answers one or other of the descriptions in r 7.01(1)(a)-(n); and then it is for the defendant to show (if the defendant be so advised) that there is a high degree of certainty that the plaintiff's claim (as a whole) will fail.[22]

The scheme of Order 7 of the SCR is broadly similar to Part 10 of the NSW Rules,[23] but I do not agree with the view expressed by Cavanough J in Puccini Festival that there is no relevant distinction between the NSW Rules and the SCR for present purposes. There is, in my view, a critical difference. The SCR, unlike their NSW counterpart, require the Court to be "satisfied" on an application for leave to proceed under r 7.04 that the subject matter of the proceeding falls within one or more of the categories of r 7.01, and require an application for leave to proceed to be supported by affidavit or other evidence showing the grounds on which the application for leave is made. The same standard must be met by a plaintiff opposing an application to set aside service under r 7.05.[24] In Williams v The Society of Lloyd's,[25] McDonald J held that the retention in the SCR of the requirement that the Court be "satisfied" leads to the conclusion that it is still necessary, as enunciated by Dean J in Carroll v Laurie[26] and W.A. Dewhurst & Co Pty Ltd v Cawrse[27], for a plaintiff to show a strong arguable case that r 7.01 is engaged and thus that service outside Australia was authorised.[28] In Fujitsu Australia Ltd v Dewar Electronic Pty Ltd,[29] Gillard J cited Williams v The Society of Lloyd's as authority that the burden was on the plaintiff to show a strongly arguable case, although His Honour did so without reference to, or consideration of, Agar v Hyde. However, in an earlier case, Eagle v Delta Haze Corporation,[30] Mandie J cited the judgment of Gleeson CJ in Agar v Hyde along with Williams v The Society of Lloyd's as authority that the question is whether there is a good or strong arguable case that the jurisdictional nexus exists. It is implicit that Mandie J did not consider that the approach of the plurality in Agar v Hyde in respect of the NSW Rules applied in the Victorian context.

14 I am not persuaded that the plurality view of the NSW Rules has application to

r 7.01. In my view, the SCR are materially distinguishable because of the retention of the requirement for the Court, in an application for leave to proceed under r 7.04, "to be satisfied" that the subject matter of the proceeding is within r 7.01. Accordingly, it follows that I am not persuaded that W.A. Dewhurst & Co Pty Ltd v Cawrse, which was applied in Williams v The Society of Lloyd's and more recently in Schib, is no longer good law in Victoria. Those cases establish that the onus is on a plaintiff to show a strong arguable case as to the existence of the jurisdictional facts supporting service of a claim outside of Australia. That onus is not satisfied merely by showing that the claims made in the originating process are of a kind referred to in r 7.01.

Is there a strong arguable case that the contracts were made in Victoria?

15 It was not in controversy that the Court must apply the provisions of the United Nations Convention on Contracts for the International Sale of Goods 1980 ("the Convention") governing formation of contracts in determining whether there is a strong arguable case that the contracts were made in Victoria.[31] The Convention applies because the sales contracts were between parties whose respective places of business were each in States which had ratified the Convention, namely Victoria in the case of Castel and China in the case of TCL, and the parties did not contract out of the Convention.

16 Castel's case was simply put. It submitted that the contracts in question were made in Victoria because TCL's acceptance of Castel's requests for the supply of the TCL products to Castel ("the orders") was communicated through the dispatch of pro forma invoices for the products, which Castel received in Victoria. Castel argued that the orders constituted offers under Article 14(1) of the Convention, that the issuing of the pro forma invoices constituted acceptance of the offers under

Article 18 of the Convention and that by Articles 23 and 24, the contracts became binding when Castel received the invoices in Victoria.

17 By Article 14(1), a proposal for concluding a contract constitutes an offer:

... if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance. A proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and the price.

The offer becomes effective when it reaches the offeree.[32]

18 By Article 18 of the Convention, a statement made by, or other conduct of, the offeree indicating assent to an offer is an acceptance[33] which becomes effective at the moment the indication of assent reaches the offeror.[34]

A contract is concluded at the moment when an acceptance of an offer becomes effective in accordance with the provisions of this Convention.

By Article 24:

... an offer, declaration or acceptance or any other indication of intention "reaches" the addressee when it is made orally to him or delivered by any other means to him personally, to his place of business or mailing address or, if he does not have a place of business or mailing address, to his habitual residence.

20 TCL argued that the contracts in question were made in China because the pro forma invoices constituted offers which Castel accepted by signing the invoice and returning the signed invoice to TCL in China by fax or email, and/or by raising a letter of credit in favour of TCL payable to TCL in China. TCL argued that the orders did not constitute offers within the meaning of Article 14(1) because the orders were not "sufficiently definite" about key aspects of the orders, particularly in respect of the quantity, type, price and shipment of the goods. TCL argued alternatively that if the orders constituted offers, the pro forma invoices constituted counter-offers under Article 19 because the products, quantities and prices set out in the pro forma invoices differed from those in the orders, and because the invoices contained the additional stipulation of shipping details, which did not appear in the orders. Article 19 provides that:

(1) A reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer.

....

(3) Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party's liability to the other or the settlement of disputes are considered to alter the terms of the offer materially.

... the offeree may indicate assent by performing an act, such as ... payment of the price, without notice to the offeror, the acceptance is effective at the moment the act is performed...

22 I agree with the Associate Justice that Castel has made out a strongly arguable case that the sales contracts were made in Victoria when Castel received TCL's proforma invoices. On the evidence, the common practice of the parties was for Castel to order products on the parties' understanding that the order was subject to discussion on the terms of the order. Once the terms of the order were settled, TCL would then set out the agreed terms in the pro forma invoice that it sent to Castel. Based on that evidence, there is a strongly arguable case that the orders satisfied the requirements of Article 14(1) to constitute offers in that the orders listed the types of products that Castel desired to purchase by model, quantity required and the unit cost. Based on the evidence about the common practice to settle the terms of the order before an invoice was issued, there is a strong arguable case that acceptance of the offer was constituted by the act of issuing the pro forma invoice and, on the present state of the evidence, a strong arguable case that the issue of the pro forma invoice did not amount to a counter-offer.

Is there a strong arguable case that the contracts are governed by the law of Victoria?

23 As there is no choice of law provision in the contracts and the Convention does not deal with choice of law, the law governing the contracts falls to be determined by considering the system of law with which the contracts have the closest connection.[35] That requires consideration of the terms and nature of the contract and the surrounding circumstances.[36] Contrary to TCL's submission, the relevant factual matrix in the present case includes the General Distribution Agreement ("GDA") under the umbrella of which the sales contracts were made. I reject the submission for TCL that it is not permissible for the Court to have regard to the GDA in determining the governing law of the sales contracts. TCL argued that reference could not be made to the GDA because Castel does not rely on that agreement for its claims. But it is not to the point that Castel does not sue on the GDA. That is not the test. The test for discovering the proper law of the sales contract is well established and the approach is to discover the law with which the sales contracts have the closest connection. In that context, it is material to have regard to the umbrella distribution agreement under which TCL contracted to supply products to Castel for resale in Australia. TCL also argued that, in any event, the GDA is not a contract for the sale of goods under the Convention. That may be accepted but the point is irrelevant to this issue because the Convention does not, in any event, deal with choice of law.

24 I am satisfied that there is a strongly arguable case that the contracts are governed by the law of Victoria, rather than China. The commercial relationship between Castel and TCL was governed by the GDA under which Castel was appointed the exclusive distributor of TCL products in Australia. TCL agreed to supply its products to Castel for that purpose, and Castel agreed to purchase a minimum number of products each year during the term of the distributorship. Furthermore, the products for distribution in Australia had to be manufactured to Australian specifications. Of particular significance is the fact that the GDA, which governed the broad parameters of the commercial relationship between Castel and TCL, provided for disputes between the parties to be arbitrated in Australia. These factors carry greater weight, in my view, than the fact that the subject goods were manufactured in China and delivered in China on FOB shipment terms in China.

Is there a strong arguable case that the contracts were breached in Victoria?

25 I am not satisfied that Castel has made out a strong arguable case that the contracts were breached in Victoria. Castel argued that the place of breach was Victoria because Castel was contractually responsible for defects in goods that occurred beyond the time of FOB delivery. That contention must be rejected. The terms of delivery of the products under the contracts were FOB to ports in China and, under such shipment terms, delivery occurs and the contract is performed at the port where goods are shipped.[37] If there was any breach by TCL either in time of delivery or the supply of products that did not meet contractual specifications, the breach took place at the port of shipment and not the port of delivery.

26 On 4 February 2012, the Associate Justice ordered TCL to pay Castel's costs of and incidental to the r 7.05 application, reasoning that there were no special circumstances that would justify a departure from the general practice that costs follow the event. TCL has appealed the costs order. By s 17A(2)(b) of the Supreme Court Act 1986 (Vic), TCL requires the leave of the Court to appeal. As the order for costs was made on 4 February 2013, the new rules for appeal are applicable[38] and TCL must demonstrate legal error in Her Honour's decision on costs.

27 TCL argued that the Associate Justice erred in law by applying the usual order for costs in a concluded proceeding, and not the rule governing costs in an interlocutory proceeding, namely r 63.20 of the SCR. Rule 63.20 prescribes that each party shall bear that party's own costs of an interlocutory application unless the Court otherwise orders. In TTE Pty Ltd v Ken Day Pty Ltd[39] Martin J said about the corresponding rule in the Northern Territory rule that:

... there must be something exceptional about the circumstances of the interlocutory application under consideration to lead the Court, in the exercise of its discretion, to make an order as to costs, taxation and payment.

Given the tenor of the rules, it would not be just to make interlocutory orders for costs, or if made to order that they may be taxed earlier than completion of the proceedings, with a view to punishing the unsuccessful party. To do so may engender a reluctance in parties to properly ventilate their problems during the pre-trial process. What is required is an approach which seeks to have a successful party reimbursed the expense of interlocutory proceedings which, for example, would have been unnecessary if the other side had acted reasonably or which are unnecessarily burdensome or which are made at a time, such as here, when that party has been deprived of the value of the work done in preparation of his case for trial. In such instances, and the list is not intended to be definitive or complete, it may well be within the Court's discretion to exercise the power to override the principles established by the rules.

Costs in interlocutory matters no longer follow success. No order as to costs ought to be made against the unsuccessful party, in the usual run of cases, even if contested, if the grounds of the application or resistance [of that party], as the case may be, are reasonable. However, if such application or resistance [by the unsuccessful party] is without real merit, as is often the case, the successful party should not have to bear his [own] costs.[40]

TCL argued that these observations were apposite to r 63.20 and that the Court should similarly approach the question of costs under r 63.20. TCL argued that there was no proper ground for the Court in the circumstances of this case to depart from the general rule under r 63.20 that each party is required to bear its own costs.

28 Rule 63.20 reflects the position that interlocutory applications usually do not conclude the proceedings so that the Court is often not in a position at that stage of the proceedings to determine where the justice lies between the parties in any costs order. Thus, under r 63.20 the starting point is that each party is to bear their own costs, subject to the discretion of the Court. How that discretion is to be exercised is not however limited by r 63.20 and the overriding consideration in all cases will be whether there is some circumstance that justifies a costs order in order to do justice between the parties. In that regard, it may be accepted that the matters referred to in TTE Pty Ltd v Ken Day Pty Ltd are matters that may bear upon whether to exercise the discretion to make an order for costs, but each particular case falls to be considered on its own merits. The fact that an applicant is unsuccessful in its application will not dictate the outcome that a costs order should be made against it (absent special circumstances), but the fact that the application was reasonably made and with merit will not compel the outcome that the Court should not "otherwise order" under

29 I am not persuaded that the Associate Justice acted on a wrong principle or that there was some error in exercising her discretion under r 63.20 to order costs against TCL. The Court retains a general discretion under r 63.20 which is not circumscribed other than by the requirement to exercise the discretion judicially. It was open in the context of this case for the Associate Justice to exercise her discretion and to order costs on the basis that Castel should get its costs as the successful party. Although interlocutory in nature, this was a substantive application to set aside service of Castel's Claim on the basis that there was no jurisdictional nexus. If successful, the proceedings would have been brought to an end. TCL failed in that application and an order for costs based on the general practice was justifiable as a proper exercise of discretion in the circumstances. No legal error was demonstrated.

30 The appeal on the substantive issue is dismissed and leave to appeal from the costs order is refused.

[1] Rule 7.01 relevantly provides that an originating process may be served out of Australia without order of the Court where:

(f) the proceeding is one brought to enforce, rescind, dissolve, rectify, annul or otherwise affect a contract, or to recover damages or other relief in respect of the breach of contract, and the contract -

(i) was made within Victoria;

(ii) ...

(iii) is governed by the law of Victoria;

(g) the proceeding is brought in respect of a breach committed within Victoria of a contract wherever made, even though that breach was preceded or accompanied by a breach out of Victoria that rendered impossible the performance of that part of the contract which ought to have been performed within Victoria.

[2] An application under r 7.05 can be made by the defendant before filing an appearance (r 8.09) or pursuant to a conditional appearance filed under r 8.08.

[3] Appeals to the trial division filed on or after 1 January 2013 must show legal error: Supreme Court (Associate Judges Appeals Amendment) Rules 2012 (Vic).

[4] Schib Packaging Srl v Emrich Industries Pty Ltd (2005) 11 VR 268, 271 [10] (Charles JA).

[5] [2000] HCA 41; (2000) 201 CLR 552.

[7] The respondent in the appeal to the High Court.

[8] Supreme Court Rules 1970 (NSW), Pt 10 r 2(2) [Rules as originally made].

[9] Supreme Court Rules 1970 (NSW), Pt 10 r 2(1) [Rules as amended].

[10] Agar v Hyde [2000] HCA 41; (2000) 201 CLR 552, 569 [39] and 571 [43] (Gaudron, McHugh, Gummow and Hayne JJ).

[11] Ibid 573 [47] [Footnote omitted].

[17] [2007] VSC 288; (2007) 17 VR 36.

[18] [2005] VSCA 236; (2005) 12 VR 268.

[20] [1960] VicRp 44; [1960] VR 278 (Dean J).

[21] [1994] VicRp 19; [1994] 1 VR 274 at 291 (McDonald J).

[22] Puccini Festival Australia Pty Ltd v Nippon Express (Australia) Pty Ltd [2007] VSC 288; (2007) 17 VR 36, 39 [14].

[23] Dow Jones & Co Inc v Gutnick (2002) 210 CLR 575, 595 [3] (Gleeson CJ, McHugh, Gummow and Hayne JJ).

[24] Williams v The Society of Lloyd's [1994] VicRp 19; (1994) 1 VR 274, 291 (McDonald J).

[25] [1994] VicRp 19; (1994) 1 VR 274.

[26] [1959] VicRp 47; [1959] VR 275.

[27] [1960] VicRp 44; [1960] VR 278.

[28] Williams v The Society of Lloyd's [1994] VicRp 19; (1994) 1 VR 274, 290. See also Contender 1 Ltd v LEP International Pty Ltd [1988] HCA 60; (1988) 82 ALR 394, 397.

[29] [2001] VSC 222.

[30] [2000] VSC 513.

[31] The Convention has become part of the law of Australia and relevantly, part of the law of Victoria, by virtue of the Sales of Goods (Vienna Convention) Act 1987 (Vic).

[32] United Nations Convention on Contracts for the International Sale of Goods 1980, art 15.

[35] Bonython v The Commonwealth [1950] UKPCHCA 3; (1950) 81 CLR 486, 498; Amin Rasheed Shipping Corp v Kuwait Insurance Co [1984] AC 50, 61; Compagnie d'Armement Maritime SA v Compagnie Tunisienne de Navigation SA [1971] AC 572.

[36] Bonython v The Commonwealth [1950] UKPCHCA 3; (1950) 81 CLR 486, 500; Weckstrom v Hyson [1966] VicRp 38; [1966] VR 277, 282; Akai Pty Ltd v People's Insurance Co Ltd (1996) 188 CLR 418, 441 (Toohey, Gaudron and Gummow JJ).

[37] Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyd's Rep 240, 247-248. See also Lewis Construction Co Pty Ltd v M. Tichauer Societe Anonyme [1966] VicRp 45; [1966] VR 341, 346; Crozier, Stephens & Co v Auerbach [1908] 2 KB 161, 165-6.

[38] Supreme Court (Associate Judges Appeals Amendment) Rules 2012 (Vic).

[39] (1990) 2 NTLR 143.