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Orica Australia Pty Ltd v Garard Chemical Engineering Pty Ltd [2013] NSWSC 1426 (29 January 2013)

Last Updated: 27 September 2013

EX TEMPORE JUDGMENT

1. I propose to order that security be provided in the sum of $75,000. These are my reasons.

Background

2. These proceedings were commenced on 21 June 2012 in the Equity Division. The proceedings concern the competing claims of the plaintiff/cross-defendant ("Orica") and the defendant/cross-claimant ("Garard") to certain intellectual property relevant to chlorine valve shut down mechanisms which the parties have described as New ChlorGuard Units or the New ChlorGuard Intellectual Property ("the IP").

3. Garard filed its defence and cross-claim on 13 August 2012. On 27 August 2012 detailed orders were made resolving certain interlocutory disputes and at that point the matter was entered into the Commercial List.

Notice of Motion for security

4. By notice of motion filed on 2 November 2012 Orica seeks the following orders: -

(1) Pursuant to rule 42.21(1)(d) of the Uniform Civil Procedure Rules, section 1335(1) of the Corporations Act 2001 (Cth) and/or the inherent jurisdiction of the Court, the cross-claimant give security in such amount as the Court deems appropriate for the costs of the cross-defendant up to the date of the making of this order and to be incurred up to and including the hearing of this matter.

(2) Until the security referred to in order 1 is provided, the proceedings be stayed.

(3) The second cross-defendant have liberty to apply to increase the amount of the security ordered pursuant to order 1, should that amount prove inadequate.

5. The motion came before me in the Commercial List on 16 November 2012, on which date I set it down for hearing before me today.

The competing claims

6. Orica claims that it and Garard developed the IP. Orica contends that by reason of an agreement called "Confidentiality Agreement" made between the parties and dated 28 January 2011, the IP developed between Orica and Garard during the period July 2010 and December 2011 belongs to it.

7. There is a dispute on the pleadings as to whether this construction of the Confidentiality Agreement is correct. I do not express any view about that matter today. For present purposes, the point is that Orica's claim, as pleaded, does not require a determination of who (Orica or Garard) developed the IP. Orica's case simply involves proof that the IP was developed and that its construction of the Confidentiality Agreement is correct.

8. On the pleadings, there is no dispute of any substance as to the fact of the development of the IP or its nature (see statement of claim par 21 and the response to that paragraph in the defence). What is in dispute, in addition to the proper construction of the Confidentiality Agreement, is whether, as a matter of fact, as Garard pleads, Orica played only a limited role in the development of the IP. However, that is irrelevant to Orica, assuming that its construction of the confidentiality agreement is correct.

9. By its cross-claim, Garard claims that it is the legal or equitable owner of the IP, either solely or jointly with Orica.

10. Allied to its claim to be joint equitable owner of the IP, Garard claims that each of Orica and Garard hold the IP (and related components and commercial opportunities) on a constructive trust for each other in shares commensurate to their financial and non-financial contribution ("the Constructive Trust Claim").

11. Alternatively, Garard claims entitlement to payment on a quantum meruit basis for a reasonable amount for the time, labour, expertise and costs incurred by it in relation to the IP ("the Quantum Meruit Claim").

Security application - the threshold question

12. There is no dispute on this application that there is credible testimony that in relation to the cross-claim, Garard may be unable to pay Orica's costs, as cross-defendant, in the event that the cross-claim is unsuccessful. Part of the evidence before me relevant to that aspect of the matter is that there is pending in the Federal Court of Australia a winding up application filed in September 2012 at the suit of the Deputy Commissioner of Taxation. There are two supporting creditors. Mr Emmett, who appeared for Garard, informed me that the application is currently returnable in early February 2013, that negotiations are taking place with the Deputy Commissioner of Taxation and that those negotiations may resolve the matter. Negotiations with the supporting creditors are also said to be taking place or about to take place.

13. Nonetheless, as I say, the parties do not dispute the Court's discretion to order security has been triggered. It thus falls on Garard to satisfy the Court that, taking into account all relevant factors, the Court should exercise its discretion by either refusing the security, or by ordering security in a lesser amount than is sought by Orica.

Defensive cross-claim

14. The primary basis relied upon by Mr Emmett to resist an order for security was his submission that the cross-claim was "a natural response" to Orica's claim and arose from the same factual matrix as that claim. Mr Emmett drew my attention to the observations of Rolfe J approved by the Court of Appeal at [15] in Concrete Constructions Pty Ltd v Dalma Formwork Pty Ltd [1999] NSWCA 16 as follows: -

"In circumstances where the claim and the cross-claim arise out of the same, or essentially the same, factual matrix this, in my opinion, is a very important consideration. It has been frequently and consistently said by Judges sitting in this Division that an order for security will not generally be made in such circumstances, in the exercise of the Court's discretion. It would, in my view, be quite wrong to preclude a party from litigating matters by way of a defence to a cross-claim merely because that party has been the initial institutor of the proceedings. The conduct of the other party may have forced the allegedly impecunious party to take the litigious initiative, whilst not constituting misconduct. Put simply if [Concrete] seeks to recover any party of the debt issues raised by Dalma in its claim would be available to it as a defence, and there has never been any suggestion that a party could be precluded from defending proceedings, where the defence is bona fide, by reason of impecuniosity. It is, therefore, a somewhat [arid] exercise to be considering an application for security for costs if the plaintiff can be cast in the role of a defendant and can litigate the very matters the subject of its claim by way of defence."

15. In a general sense, Garard's cross-claim does arise out of the same factual matrix as Orica's claim. However, as Mr Bova, who appeared for Orica, submitted there is a significant difference in the way that Orica puts its claim on the one hand, and as to the way Garard seeks to develop its cross-claim on the other. As I have said, Orica simply claims that it and Garard developed the IP in the relevant period and that, by reason of the Confidentiality Agreement, Orica owns the IP.

16. Garard claims it (not Orica) developed the IP and contends that the Confidentiality Agreement does not apply. One of Garard's claims is that it is the legal owner of the IP. To that extent it can perhaps be said that the cross-claim is a "reflex" (to adopt the language of McDougall J in Dunnet Properties Pty Ltd v Cussen [2009] NSWSC 961 at [35]) of Orica's claim.

17. However, Garard also propounds separate bases for relief, namely the Constructive Trust Claim and the Quantum Meruit Claim.

18. These may be a "natural response" to Orica's claim, but on the evidence of Mr Bova's instructing solicitor, Mr Bradley, they would require a detailed consideration of events between May 2010 and December 2011. Such consideration would not be necessary, according to Mr Bradley, had the Constructive Trust and Quantum Meruit Claims not been brought. I understand Mr Bradley's evidence to be to the effect that detailed consideration of the events between May 2010 and December 2011 would not be necessary to make out Orica's claims.

19. Mr Bradley's evidence in support of this contention was given in a careful and detailed manner. It was not answered by evidence from Garard's solicitor, Mr Doherty, or challenged in cross-examination. I accept it.

20. I accept Mr Bova's submission that, for these reasons, this aspect of the cross-claim should be seen as a "sword" not arising out of the factual matrix raised by Orica's claim, but, rather, giving rise to its own factual matrix.

21. For these reasons, I am not persuaded that I should refuse security on this ground.

22. However, I accept that such common ground as may emerge between the exploration of the facts on the claim and cross-claim may be relevant to the quantum of any order.

The undertaking given by Mr Szkirpan

23. The other matter put forward by Mr Emmett as being a reason why the discretion to order security should not be exercised is the giving of an undertaking to the Court by Mr Szkirpan to "guarantee" the payment of any costs ordered to be paid by Garard on the cross-claim.

24. Mr Szkirpan is one of two directors of Garard. He has been a director since about November 2012. He is not one of the three shareholders of Garard, none of whom, it seems, are prepared to come out from under the "skirts" of Garard to make any offer concerning costs. Nonetheless, the fact is that Mr Szkirpan is willing to put his assets into play and risk bankruptcy if a costs order is made and he does not pay it.

25. The fact that Mr Szkirpan is prepared to put his assets into play is obviously a factor I must take into account. However, the authorities make clear that it is not a decisive or necessarily critical factor; see for example, the observations of Winneke P and Phillips JA in Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] VSCA 43; [1999] 2 VR 191 at [23-24]; cited with approval in Jazabas Pty Ltd v Haddad [2007] NSWCA 291 per McClellan CJ at CL at [79] and Mason P at [2].

26. Further, although Mr Szkirpan has given this undertaking, there is no evidence before me as to Mr Szkirpan's ability to meet the undertaking. That is, there is no evidence of Mr Szkirpan's financial position, and thus no evidence as to whether he could meet any costs order made.

27. In my opinion, the offer of an unconditional undertaking of the kind proffered by Mr Szkirpan must be approached with some caution when it is not supported by any evidence as to his ability to make good on the undertaking.

28. Not only that, the evidence shows that Garard itself has $50,000 on deposit with the National Australia Bank and further "deposits" of $40,441. These matters are revealed in Garard's balance sheet as at 30 September 2012. No reason has been advanced as to why Garard does not make this sum, or any part of it, available for security. There is no suggestion, and certainly no evidence, that the use of this sum to provide security would stultify the litigation or impede the pursuit by Garard of its business interests.

29. Mr Emmett pointed to the relatively thin nature of the profit made by Garard in the 30 September 2012 accounts, especially when compared to its turnover. Mr Emmett suggested there may be a basis to apprehend that some need may arise for these sums on deposit. However, I am not prepared to speculate about that matter. Those who know the true position, namely the directors and shareholders of Garard, have elected not to adduce any evidence about the matter. If there was any need for the money, no doubt evidence would have been adduced.

30. I take into account Mr Szkirpan's offer. It is a factor that I must consider. But in the light of Garard's demonstrated ability to itself provide some kind of security, and the absence of any evidence as to Mr Szkirpan's ability to make good the undertaking, I do not consider it a reason to decline the security.

Quantum

31. Mr Bradley has estimated that the prosecution of the Constructive Trust and Quantum Meruit Claims will cause Orica to incur further costs in the sum of $131,245. Mr Bradley gives detailed reasons for coming to that conclusion. Included in those reasons is an estimate that the case will take hearing three days and that 80 per cent of that time will be taken up by defending the Constructive Trust and Quantum Meruit Claims. This is to be contrasted with Mr Doherty who opined that the Constructive Trust and Qantum Meruit Claims would add two days additional preparation but would not add anything to the hearing time.

32. Mr Emmett submitted Mr Bradley's figures were "out of proportion". But Mr Bradley's evidence reveals he is a very experienced solicitor, and that he has given careful and detailed reasons for his conclusions. Mr Doherty's opinions were more briefly expressed and he gave no evidence of his background or experience. In the circumstances I accept Mr Bradley's evidence.

33. I take into account the possibility of the overlap between the time spent on the cross-claim, and the time which will have to be spent in any event dealing with Orica's claim. It is not possible for me to be scientific about this but, doing the best I can, it appears to me the appropriate order I should make is that there be security but it be in a figure less than the sum of Mr Bradley's estimates.

34. The conclusion to which I have come is that I should order security in the sum of $75,000. I invite the claimant to bring in short minutes to give effect to those reasons.

35. The exhibits on the motion may be returned.

Costs

36. It is common ground that following upon the reasons I have just delivered there should be an order that Garard pay Orica's costs of the motion of 2 December 2012.

37. Orica seeks a special order for costs based upon offers made by its solicitors on 19 December 2012 and 24 January 2013. Both those offers were to accept security in amounts slightly less than I have indicated I will order.

38. Notwithstanding that fact, I am not able to come to the conclusion it was unreasonable of Garard not to accept either offer. I do not propose to make any special order as to costs of the exhibit on that application.

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