Silkearl Pty Ltd v Ainsworth Game Technology Ltd

REASONS FOR JUDGMENT 1 This is an application by the applicant brought by notice of motion dated 13 March 2006 and filed on the same day that the Court grant leave to the applicant to carry on this proceeding otherwise than by a solicitor, through the applicant's director and public officer Mr Sergio Adolfo Maiocchi. (See Order 4 rule 14(2); and Order 9 rule 1.) The applicant has previously had solicitors and counsel appearing for it. 2 The respondent opposed the application, but did not oppose Mr Maiocchi appearing on the application on behalf of the applicant. I gave that limited leave. 3 The principles by reference to which the discretion should be approached have been discussed in a number of cases. In some jurisdictions, the granting of leave under rules such as Order 4 rule 14(2) has been held apparently to require exceptional or special circumstances: eg Bay Marine Pty Ltd v Clayton Country Properties Pty Ltd (1986) 8 NSWLR 104, 107B, 108 E-F, 110 D-G. 4 In Molnar Engineering Pty Ltd v Burns (1984) 3 FCR 68, the Full Court of this Court, in particular Smithers J and Keely J, recognised that the discretion was a broad one, to be exercised judicially depending on the existence of sufficient cause. See in particular Molnar at 74-75 per Smithers J and 80 per Keely J. In Termi-Mesh Australia Pty Ltd v Josu Manufacturing Pty Ltd [1999] FCA 1241, French J set out the guiding approach, which has been followed and applied by other judges of the Court: see Australian Communications Authority v Viper Communications Pty Ltd [2000] FCA 982; Oakley Inc v Franchise China Pty Ltd [2002] FCA 404. In Termi-Mesh French J said the following at [10]-[14]: Order 9 rule 1 of the Federal Court Rules provides, in the relevant parts: "1(1) A respondent may enter an appearance and may defend a proceeding by a solicitor or in person. . . . (3) Notwithstanding sub-rule (1) and subject to any Act, a corporation may not without the leave of the Court or a Judge enter an appearance or defend any proceeding except by a solicitor." It should also be noted that O 4 r 14(2) provides that: "Except as provided by or under any Act, a corporation may not, without the leave of the Court, commence or carry on any proceeding otherwise than by a solicitor." The burden of authority in the Federal Court relates to the latter rule. Equivalent rules in other jurisdictions and particularly England and other Australian States set up an "exceptional circumstances" or like test before leave can be granted - Arbuthnot Leasing International Ltd v Havelet Leasing Ltd [1991] 1 All ER 591; Bay Marine Pty Ltd v Clayton Country Properties Pty Ltd (1986) 8 NSWLR 104. In the latter case, Samuels JA in the New South Wales Court of Appeal, saw the court's discretion to dispense with its rules about representation as one to be exercised "only with the most meticulous care" and in exceptional circumstances. The position under the Federal Court Rules however is not as restrictive as that under the English Rules and various of the State Supreme Court Rules. In this respect I refer to what I said in Simto Resources Limited v Normandy Capital Limited (1993) 11 ACLC 856. Although the rationale for the restriction is basically the same in all jurisdictions, the power of the Federal Court to grant leave to a corporation to carry on a proceeding, otherwise than by a solicitor, is conferred as an integral part of the Rules in O 4 r 14 and O 9 r 1. There is no threshold requirement of special or exceptional circumstances. As Smithers J said of O 4 r 14(2) and O 9 r 3 in Molnar Engineering Pty Ltd v Burns (1984) 3 FCR 68 at 73: "Those rules proceed on the basis that there is a discretion in the court to permit a company to commence and carry on any proceedings other than by a solicitor and to enter an appearance or defend any proceeding without a solicitor and, it would seem, it is a discretion to be exercised by reference to all relevant considerations." Nevertheless the policy of the rule is clear that ordinarily a corporation will be required to be represented by a solicitor. Relevant factors for dispensing with that requirement include the financial capacity or lack of capacity of the corporation and those standing behind it, the effect of diverting company resources to paying legal expenses, the nature of the company's undertaking, its financial structure, its ability to retain and pay its staff and the identity and spread of its shareholders. The factual complexities of the case and the capacity of the proposed representative to conduct it effectively are also relevant - VN International Video Pty Ltd v West End HK TVB Video & Others (1996) 14 ACLC 1308. There is no doubt that those who chose to carry on their businesses through corporate structures enjoy advantages that those carrying on business on their own account do not enjoy. They also acquire disabilities and obligations. One of the disabilities is that which is imposed by the Rules of Court under consideration in this case. A distinction may be drawn between the case in which the company in question is applicant and that in which it is respondent. In the latter case it may be a more liberal approach to the grant of leave is warranted. … 5 I have also had regard to what was said in Checked-Out Pty Ltd v Eagle Eye Inspections Pty Ltd [2002] FCA 1002. 6 It is necessary to outline the issues in the case and how the case has been conducted to date. 7 The application was supported by a 14 page statement of claim together with a 5 page schedule. In a summary prepared by counsel then appearing on behalf of the applicant in November 2005, the dispute was described as follows: The following summary is not intended to traverse, alter or amend the statement of claim. Nature of the dispute 1. The dispute concerns SilkEarl's claim that Ainsworth has failed to pay all royalties payable to it under the Royalty Agreement they made on 27 July 1999 (which was amended on 18 October 2001) and the determination of this question will require the Court to construe that Agreement and in particular the critical clauses 3, 4(a)(i) to (iii), 4(c), (d), (e)(i) to (iii), (h), 5 and 6(b), and from the evidence to consider which, if any of the terms of the Royalty Agreement was breached and then to determine what damages ought to be awarded to SilkEarl. 2. Although Ainsworth paid to SilkEarl some monthly payments, SilkEarl shall contend that the payments it received do not accurately represent the amount of royalties which it ought to have been paid and which Ainsworth was and is liable to pay under the terms of the Royalty Agreement. 8 The issues which were perceived as arising were as follows: Issues, which SilkEarl believes, are likely to arise (The reference below to clauses is a reference to the clauses in the Royalty Agreement …) 3. Whether SilkEarl created and developed architecture under and in accordance with the Royalty Agreement and did it provide and make that architecture available to Ainsworth, and if so was that architecture original or unique. 4. If the Architecture was not original or unique (which is not admitted), what effect, if any, did that have in relation to the obligation of Ainsworth to pay royalties to SilkEarl pursuant to the Royalty Agreement? 5. Did Ainsworth use the key elements or either of them as defined in clause 4(e)(ii) and or (iii) in any of its models of the Celebrity and or Ambassador poker machines, and if so:- (a) was it thereby liable to pay royalties to SilkEarl; and (b) what royalties are due, owing and payable to SilkEarl? and (c) by the use of either one or both of those key elements did Ainsworth engage in a contravention of s51AA and or 52 of the Trade Practices Act. 6. In respect of the issues in 5 above, does clause 4(h) have the effect of imposing on Ainsworth an obligation to establish in these proceedings that it did not use either or both of those key elements. 7. Does clause 5(c) constitute a penalty? 8. If the key elements were not used in the Celebrity models or the Ambassador models or some of them, was Ainsworth liable under clause 5 to pay SilkEarl royalties under clause 4(a)(i)-(iii)? 9. If clause 5(c) constitutes a penalty (which is not conceded), did Ainsworth develop or buy alternative architecture for its poker machines and fail to inform SilkEarl thereof for the purposes of clause 5, and if so:- (a) did that constitute a contravention of s51AA or s52; if not (b) is SilkEarl entitled to damages as a consequence of Ainsworth's breach of clause 5. 10. Was and is Ainsworth liable for royalties calculated under clause 4(a)(i)-(iii) independently of the implementation of the architecture under clause 5. 11. Did Ainsworth provide to SilkEarl the information required under clause 4(c)? 12. Whether Ainsworth paid SilkEarl all royalties it was liable to pay under the Royalty Agreement, and if not what quantum of royalties ought it have paid. 13. Assuming the evidence does not support SilkEarl's entitlement to royalties in respect of the Celebrity models or some of the Ambassador models, did clause 6(b) impose on Ainsworth an obligation to use, apply and thereby obtain the benefit of the architecture in all poker machines it manufactured and if so, was the introduction by it of Celebrity and Ambassador excel models a contravention of that provision which had the effect of depriving SilkEarl of royalties which would ought to have been payable had those models incorporated the architecture. 9 It can be seen from this document that issues of some complexity, including technical issues concerning what the applicant did, its quality and what the respondent did will arise. These technical issues concern software development and the development and use of computer-based gaming machines, involving electrical engineering considerations. 10 The relative complexity of the case is also shown by the statement of preliminary issues handed up at an early directions hearing by counsel for the respondent which is to be found at pp 17 and 18 of Exhibit 1 on the motion. One can see from this document and that referred to at [8] above that both counsel saw similar issues raised. 11 The respondent has cross-claimed against the applicant claiming that it was received and acted upon representations about information, specifications and data for a proposed architecture. These representations were said to be for manufacture or development of gaming machines. The respondent now says that the architecture was generic, not novel or unique. It claims damages in the nature of the royalties paid and loss of profit. 12 Interlocutory procedures were undertaken in 2005. There was some delay which it is presently unnecessary to relate. 13 In November 2005, a subpoena was issued on behalf of the applicant to the Liquor Administration Board for documents held relating to 4 poker machines known as Ambassador 64, Ambassador Excel, Celebrity, Celebrity Excel. These documents have been produced to the Court. The respondent claims that these documents should be kept confidential from Mr Maiocchi, though it has no difficulty with independent legal advisers or experts inspecting them on appropriate undertakings. 14 On 15 February 2006, the respondent filed a notice of motion for security for costs. This was supported by an affidavit of Julie Kathryn Ward, the solicitor for the respondent, filed 15 February 2006. She estimated legal fees ex GST of over $600,000. This affidavit was tendered on the motion by Mr Maiocchi. 15 On 24 February 2006, the respondent filed a notice of motion seeking orders that access to documents listed in a 20 page schedule to be restricted to counsel and solicitors only, and subject to an undertaking. This was supported by an affidavit of Mr Perry, a solicitor assisting Ms Ward. This affidavit was tendered on the motion by Mr Maiocchi. 16 On 28 February 2006, in purported answer to the motion of 15 February 2006 for security for costs, Mr Maiocchi swore an affidavit taking issue with the cross-claim and various other issues. It reflected a lack of coherent organisation and a lack of attention to relevance. The affidavit was read on the motion on behalf of the applicant. 17 On 13 March 2006, Mr Maiocchi swore two affidavits one said to be No. 603091 and the other No. 603121. They were read on the motion on behalf of the applicant. The first (603091) (of 27 pages and 2 large folders of annexures) was said to be in support of the applicant's position in respect of the intellectual property of the poker machine architecture of which Annexure A to the Respondent's Affidavit is indicative. The affidavit is dense and difficult to follow. It seeks to give detailed factual basis to the claims and to deny the allegations in the cross-claim. The second (603121) (of 5 pages with 91 pages of annexures) is in support of his motion. This affidavit contains a general history of the dispute from Mr Maiocchi's personal perspective. He expressed dissatisfaction with his legal advisers. He makes complaints about the conduct of the proceedings by the respondent. There are some references by assertion of not being able to afford an independent expert and of not being subject to security for costs. There is assertion that when Mr Maiocchi decided to commence these proceedings he thought that the expense would be within a budget. Among the assertions is one that he cannot pay an independent expert to have access to the confidential subpoenaed material from the Liquor Administration Board. He also asserts that he does not have money for security for costs, and that he has not the funds to engage an independent expert. A similar submission was made by Mr Van Aalst when retained by the applicant in court on a previous occasion. 18 On 13 March 2006, the respondent filed an affidavit of Ms Ward of 3 pages and 160 pages of annexures dealing with the communications that have taken place between Mr Maiocchi and Mallesons Stephen Jaques. This was read by the respondent on the motion. 19 Also on 13 March 2006, the respondent filed an affidavit of Mr Perry sworn 13 March 2006, deposing to the royalty payments to the applicant for 2001-2006 being in excess of $750,000. 20 On the same day, another affidavit (of 6 February 2006) of Mr Perry outlining correspondence between Mallesons Stephen Jaques and the applicant was filed. 21 Mr Maiocchi filed two further affidavits with many annexures on 21 March 2006 including one dealing with the technology. These affidavits were read on the motion on behalf of the applicant. They reveal the likely complexity of the case. 22 On 7 April 2006, Mr Maiocchi filed an affidavit dealing with the motion and other aspects of the conduct of the case, annexing his written submissions and correspondence with Mallesons Stephen Jaques. This was read on behalf of the applicant on the motion. 23 For the purposes of the application the respondent conceded that the applicant had an arguable case. 24 At the hearing of the motion, the respondent tendered a bundle of documents including correspondence between Mr Maiocchi and the solicitors for the respondent. 25 Mr Maiocchi has asserted an inability to pay for legal advisers. There is, however, no reliable evidence concerning the financial state of affairs of the applicant or of Mr Maiocchi and anyone else with an interest in the applicant to demonstrate a lack of financial capacity to engage a solicitor or the effect upon the company of diverting its resources towards legal expenses. The affidavit of Ms Ward on the security for costs application, annexing evidence that the applicant owns no real property in New South Wales, was tendered on the motion. It is known from records of the Australian Securities and Investments Commission, also annexed to the same affidavit, that Mr Maiocchi and Mrs Maiocchi are the only two directors of the applicant, with Mr Maiocchi also being the company secretary. The applicant has two issued shares, held one each by Mr and Mrs Maiocchi, with a total issued share capital of $2. Among the bundle of documents tendered by the respondent is a facsimile Mr Maiocchi sent to Ms Ward on 11 March 2006 referring to the foreshadowed motion for security for costs, saying that he and his wife were middle class Australians and not eccentric millionaires with an excess of money. 26 There is no evidence about what cash reserves, if any, the applicant has or what funds Mr and Mrs Maiocchi have or do not have. There is, however, evidence at least of royalty payments exceeding $750,000 to the applicant by the respondent which does not support an inference of lack of financial capacity. There are some documents in the annexures to the first affidavit of Mr Maiocchi of 13 March 2006 indicating the cost of two employees of the applicant, in the years 2000 and 2001 reflecting salaries of $98,000 and $75,000 respectively. 27 Examples of the general assertions as to a lack of finances were as follows: I can say that I do not have money for a security for cost. I am preparing this affidavit myself as I can no longer afford legal representatives for my company SilkEarl Pty. Ltd. … 28 It should be noted that the general nature of such assertions in Mr Maiocchi's affidavits was taken up with him at the hearing. The following exchange took place. HIS HONOUR: None of them has any foundation by reference to disclosure of the assets of the corporation, nor is there any real disclosure as to the asset position of you or your wife. One of the bases upon which you make this application is that this is, as I would understand it, is that this is, in effect, a family company ‑ ‑ ‑ MR MAIOCCHI: That is correct. HIS HONOUR: ‑ ‑ run and owned by you and your wife. MR MAIOCCHI: Correct. HIS HONOUR: There are a whole series of assertions in your affidavit as to the lack of ability of the company to fund legal advice, and inferentially your inability to fund any legal advice, or assistance, and expert evidence. Do you wish to leave the evidence in its current form about those matters? MR MAIOCCHI: If the Court wishes I can ‑ ‑ ‑ HIS HONOUR: No, no, no. MR MAIOCCHI: Not today? HIS HONOUR: No, no. I am not running your case for you. I want you to tell me whether you wish to have an adjournment to place further evidence on. Because at the moment all I have, and I am going to deal with this motion on the basis of the evidence that you have led. Now, you are aware from those affidavits, and from the material that has been put on, that the financial position of the company is a relevant consideration. And, given the nature of the company, a relevant consideration is the financial position of you and your wife. Are you content for me to continue with this application today on the basis of the evidence that you have put forward? MR MAIOCCHI: No, your Honour. I learned this morning, when I looked at the email, the contents of the email sent by the respondent, that it is an important issue to demonstrate that actually I don't lack the fundings to pay for the presentation. So I - as I say I had to provide the proof and the case going to be stronger if I can provide the proof. HIS HONOUR: Well, this is not ‑ ‑ ‑ MR MAIOCCHI: So I don't have the proof with me at the moment. HIS HONOUR: This is not - to use the vernacular, and if I am not making myself clear I apologise and I will rephrase it, but this is not a free kick, Mr Maiocchi, this has cost the respondent a lot of money to be here today. You have had your application on for some time. Now, if you want an adjournment I will hear you as to why you shouldn't pay the costs of today, that is, the company shouldn't pay the costs of today. MR MAIOCCHI: Let me see if I understand. If I want an adjournment ‑ ‑ ‑ HIS HONOUR: You have to persuade ‑ ‑ ‑ MR MAIOCCHI: ‑ ‑ ‑ I have to pay for today? HIS HONOUR: You have to persuade me why you shouldn't pay for the costs for today to be thrown away, if they are asked for. If you don't want the adjournment we will go on with the motion on the material that you have identified. MR MAIOCCHI: I prefer not to pay for today, Your Honour. HIS HONOUR: Very well. MR MAIOCCHI: So I don't have any choice. HIS HONOUR: Well, let us move on. On that basis ‑ ‑ ‑ MR MAIOCCHI: If I may add that I was going to prepare that for the - a provision for security for costs when I thought it was fully relevant. Some of the information that the respondent has asked me is still my accountant has not requested. They want the very latest. There is an email dealing with that from me to the respondent. They want the very latest tax return that is still - the Taxation Office doesn't require. 29 I have included that transcript to demonstrate that Mr Maiocchi did not wish to run the risk of a costs order to deal with the evidence of asserted impecuniosity in more detail. 30 Shortly after this exchange I made a ruling refusing to reject [6] of the above affidavit under s 135 of the Evidence Act. I said the following: I do not propose to reject the evidence on that basis. However, it will be received only subject to the weight that in the end I give to those assertions. It is in a sense no more than unproven assertion without any foundation which the reader of the affidavit or the cross-examiner can grapple with. It does not tell me by what standard of analysis the notion of afford legal representation is brought to bear for the statement. I am not told, and the reader is not told anything about the asset and liability position of the company and its shareholders and directors. It [the reader] is not told anything of its [the company's] capacity to borrow. It [the reader] is not told anything of the competing considerations and calls upon the commercial or financial position of the company, all of which considerations are embedded within the statement, "I can no longer afford legal representation." I will allow the evidence but it will stand with the balance of the evidence with such weight as I decide appropriately to give it. Is that the only objection to the affidavit? 31 From this ruling Mr Maiocchi (who, if I may say so, is an intelligent man) understood the problems of the present evidence on the financial capacity issue. 32 The claim for confidentiality made by the respondent over certain material produced by the Liquor Administration Board under subpoena further complicates the position. In the affidavit of Mr Perry tendered on behalf of the applicant as evidence on the motion, but not read, there is a confidentiality undertaking labelled Annexure C, given by the former solicitor of the applicant over the subpoenaed material. 33 The factual and legal issues in the case are of some significant complexity. In this context, the capacity of Mr Maiocchi to conduct proceedings on behalf of the applicant is relevant, as is his involvement in the issues central to the trial and the likelihood that he will be a witness. It is clear enough in the conduct of the motion to date that it would be highly desirable if the court were assisted by the expertise of a solicitor acting for the applicant. Apart from the need for a degree of skill and assistance in a commercial case involving not straightforward issues of intellectual property, the claims for confidence will require at least one person on the applicant's side of the record who can deal with the applicant's interests without risking the loss of any confidentiality that the respondent may have. (One of the persons to whom the respondent claims the records in question should not be disclosed is Mr Maiocchi himself.) 34 Another important feature of the correspondence and the conduct of the case to date is a degree of emotive language used by Mr Maiocchi, at times involving sweeping allegations of impropriety by the respondent and its solicitors. Not all litigation can be conducted in peaceful harmony, but one of the fundamental obligations of any practitioner in the discharge of his or her obligations to the client and to the court is the civil and dispassionate communication with other parties to that litigation: see generally Ex parte Bellanto; Re Prior [1963] SR (NSW) 190 and Garrard v Email Furniture (1993) 32 NSWLR 662 at 667. 35 Without descending, in these reasons, into the detail of all the material tendered including, in particular, the correspondence, the evidence permits, indeed compels, the following conclusions: