Re Amalgamated Mining Services Pty Limited v Warman International Limited and Peko-Wallsend Operations Limited [1988] FCA 309; 88 ALR 63 Practice and Procedure (8 September 1988)

FEDERAL COURT OF AUSTRALIA

Re: AMALGAMATED MINING SERVICES PTY LIMITED
And: WARMAN INTERNATIONAL LIMITED AND PEKO-WALLSEND OPERATIONS LIMITED
No. G1069 of [1988] FCA 309; 1988
88 ALR 63
Practice and Procedure

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Wilcox J.(1)

CATCHWORDS

Practice and Procedure - Costs - Application for security for costs - Case involving question whether conduct of applicant infringes respondent's copyright - Proceedings brought after letter by respondent's solicitors warning customer of applicant of copyright claim - Application of principle that security will not be required in a case where the applicant is the "party attacked" in the litigation.

Federal Court of Australia Act 1976 s.56

Copyright Act 1968 s.202

Trade Practices Act 1974 ss.52, 536

HEARING

SYDNEY
8:9:1988

Counsel for the Applicant and Cross-Respondent: Mr D M Yates

Solicitors for the Applicant and Cross-Respondent: Blessington Judd

Counsel for the Respondents and Cross-Claimants: Mr T J Hancock

Solicitors for the Respondents and Cross-Claimants: Phillips Fox

ORDER

The application for an order for security for costs be refused.

The notice of motion dated 5 August 1988 be dismissed.

The respondents in the principal proceeding pay the costs of the applicant in the principal proceeding of the said notice of motion.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

Application has been made by the respondents in the principal proceeding, Warman International Limited and Peko-Wallsend Operations Limited, for an order that the applicant in the principal proceeding, Amalgamated Mining Services Pty Limited, give such security as the Court thinks fit for the costs of those respondents in the principal proceeding.

2. Section 56(1) of the Federal Court of Australia Act 1976 empowers the Court or a Judge to "order a plaintiff in a proceeding in the Court ... to give security for the payment of costs that may be awarded against him". The amount of such security shall be such as the Court or Judge directs: see s.56(2). The discretion thus conferred was described by a Full Court of this Court, in Bell Wholesale Company Limited v Gates Export Corporation [1984] FCA 34; (1984) 2 FCR 1 at p 4, as "unfettered". The Full Court commented that "each case must depend on its own circumstances". However, it is well established that an occasion for consideration of the exercise of that discretion arises where it is shown that the applicant in a particular proceeding is unlikely, because of its impecuniosity, to be able to meet any order for costs which may be made against it in the proceedings.

3. The evidence which has been placed before the Court in support of the present application shows that this is such a case. The two most recent annual returns filed by the applicant -- for the years ended 30 June 1984 and 30 June 1985 respectively -- show operating losses. The applicant's accumulated losses at 30 June 1985 amounted to $106,893. At that date the working capital of the applicant, that is to say current assets less current liabilities, amounted to minus $222. One thousand shares had been issued by the applicant, but there was a floating charge over all of the assets of the applicant, created on 17 June 1987, to secure loans of $400,000.

4. The applicant does not contest the proposition that the evidence indicates that it would be unlikely to be able to pay out of its own resources the amount of any costs which might be ordered against it. However, the present application is resisted upon the basis that, although the applicant initiated the present proceeding, it was really in the position of being a "party attacked" rather than a "party attacking".

5. The relevant principle was discussed by Scrutton LJ in Maatschappij Voor Fondsenbezit v Shell Transport and Trading Company (1923) 2 KB 166 at pp 176-178. In that case an application was made for an order for security for costs against one of the defendants, the contention being that the defendant was, in reality, a plaintiff because of a cross-claim made by it. In substance, Scrutton L.J. held that the relevant defendant had been forced into the proceedings in order to protect its property interests. His Lordship set out the following principle at p 177:
"The Court always, as I understand, endeavours

to be guided by the substance and not by the
form of the matter, and orders security for
costs against the foreign attacker, not
against the foreigner defending himself or his
property from attack. Thus in interpleader,
the defendant to the issue may be ordered to
give security to the plaintiff if the
defendant is really the aggressor: ..."

His Lordship then went on to consider the substance of the matter and to ask the question: "Who is the attacker and who the defender in this case?".

6. The approach taken by Scutton L.J. was adopted in the High Court of Australia in Willey v Synan [1935] HCA 76; (1935) 54 CLR 175. That was a case in which the plaintiff claimed to be entitled to certain coins which he alleged he had found on board a ship of which he was a crew member. Upon the arrival of the ship in Australia, the Customs Department took possession of the coins. The plaintiff made a claim for the coins under s.207 of the Customs Act 1901. Subsequently, the Collector of Customs gave notice to the plaintiff requiring him to commence an action for the recovery of the coins and stating that, in default of bringing such action, the coins would be condemned without further proceedings. The plaintiff then commenced an action and the Collector sought an order for security for costs. The High Court rejected the application, taking the view that, in the circumstances, the plaintiff was really a party attacked. He was in the position of being forced to take action in order to protect his claim to the coins. Latham C.J. at pp 179-180 cited the passage from the judgment of Scrutton L.J., to which I have already made reference, and he then proceeded to analyse the case before the Court by saying at p 180 that:

"In this case the Collector really initiated
legal process by giving a notice under sec.207
which would result in the exclusion of any
right of the plaintiff unless the plaintiff
himself took legal proceedings. If the
Collector had not acted under sec.207, it
would not have been necessary for the
plaintiff, in order to prevent the extinction
of his right, to take any proceedings. If, no
notice having been given, he took proceedings
in conversion or detinue, he would be in the
same position as any plaintiff who comes into
the jurisdiction to complain of an act which
he alleges to be wrongful. But, as the
Collector has given him a notice under
sec.207, he is, in effect, forced into legal
proceedings, not merely to enforce his claim,
but to prevent his claim from being
extinguished. He is therefore really in the
position of a defendant."

The position was analysed in similar terms by Dixon J: see especially pp 184-185.

7. The approach taken in Willey v Synan was followed by Blackburn C.J. in Re Travelodge Australia Ltd (1978) 21 ACTR 17 at pp 18 and 19. That was a case in which the applicant was a holder of stock in a company which had been the subject of a takeover offer. The applicant did not accept the offer and thus became a "dissenting offeree" within the meaning of s.180X(1)(c) of the Companies Ordinance 1962. He was served with a notice under that section, the effect of which would have been that, if nothing more occurred, the respondent would have been entitled and bound to acquire the applicant's stock units. In an endeavour to prevent this result, the applicant commenced proceedings in the Supreme Court of the Australian Capital Territory, seeking to obtain an order under s.180X(6) of the Ordinance to the effect that sub-s.(5) of that section was inapplicable to the case. The respondent sought an order for security for costs. Blackburn C.J., after referring to Willey v Synan, said at pp 19-20:

"There is a clear resemblance to the facts of
the case before me. The applicant is a person
who invokes a special statutory procedure in
order to preserve to himself a right which he
considers a valuable one, which by the
combined effect of a statute and the actions
of the respondent may be taken away from him.
The respondent asserts that the applicant is
the owner of the stock units and relies on the
statute to effect a transfer of those stock
units to himself. The case clearly falls
within the principle which was applied by the
High Court, and illuminated by the judgment of
Dixon J., in Willey v Synan ..."

8. In the present case, it appears that the proceeding arises as a result of a letter which was written by the solicitors for the present respondents, Messrs Phillips Fox to a Mr Catherall, who is described as "Manager, Queensland Mining Supplies". The letter is dated 23 May 1988. The letter commences:

"We act for Warman International Limited, which
instructs us that QMS has been offering to
supply AMS replacement parts for Warman
pumps."

I understand "AMS" to be an abbreviation for the name of the applicant in the principal proceeding and "QMS" to mean Queensland Mining Supplies. The letter from Phillips Fox goes on to set out Warman's claim that the reverse engineering of its pump parts constitutes an infringement of its copyright in the detailed Warman drawings of those parts. There then follows a lengthy justification of that claim, with reference to decided cases. During the course of the argument, on a number of occasions, reference is made to "QMS's solicitors"; the suggestion clearly being made that the letter might be shown to the solicitors acting for QMS in order that they might advise as to the correctness of what is being asserted. The letter concludes as follows:

"Accordingly, Warman requires from QMS an
undertaking that it will immediately cease and
desist from:
(a) reverse-engineering Warman pump parts;
and
(b) selling or offering for sale
reverse-engineered Warman pump parts,
whether those parts have been
manufactured in Australia or elsewhere.
We would ask that you let us have the required
undertaking, in writing, within twenty-one
(21) days of the date of this letter, failing
which Warman will take such action as it may
consider necessary to protect its rights,
without further notice to QMS."

9. There is no evidence as to any reply to that letter. The present proceeding was instituted on 7 July 1988, when an application was filed on behalf of Amalgamated Mining Services seeking the following relief:

"1. A declaration that the threats made by
the applicant in the letter dated 23 May,
1988 and addressed to Mr Catherall,
Manager, Queensland Mining Supplies are
unjustifiable within the meaning of
section 202 of the Copyright Act 1968.
2. A declaration that the said threats of
the respondent constitute conduct engaged
in by the respondent in contravention of
section 52 of the Trade Practices Act
1974 and the making of a representation
by the respondent in contravention of
section 53(g) of the said Act.
3. An order that the respondent be
restrained from continuing to make the
threats contained in its said letter.
4. Damages under section 202 of the
Copyright Act 1968.
5. Damages under section 82 of the Trade
Practices Act 1974.
6. Costs.
7. Such further or other relief as to the
Court seems fit."

10. Section 202 of the Copyright Act 1968 relevantly provides as follows:

"202. (1) Where a person, by means of circulars,
advertisements or otherwise, threatens a person with an
action or proceeding in respect of an infringement of
copyright, then, whether the person making the threats
is or is not the owner of the copyright or an exclusive
licensee, a person aggrieved may bring an action against
the first-mentioned person and may obtain a declaration
to the effect that the threats are unjustifiable, and an
injunction against the continuance of the threats, and
may recover such damages (if any) as he has sustained,
unless the first-mentioned person satisfies the court
that the acts in respect of which the action or
proceedings was threatened constituted, or, if done,
would constitute, an infringement of copyright.
(2) ...
(3) ...
(4) The defendant in an action under this section
may apply, by way of counterclaim, for relief to which
he would be entitled in a separate action in respect of
an infringement by the plaintiff of the copyright to
which the threats relate and, in any such case, the
provisions of this Act with respect to an action for
infringement of a copyright are, mutatis mutandis,
applicable in relation to the action.
(5) ..."

It will be noted that in a case where proceedings are brought under s.202 the onus rests upon the person asserting copyright to prove the necessary facts to support that claim.

11. In the present case the application also relies upon ss.52 and 53(g) of the Trade Practices Act 1974; but it appears from what has been said by counsel that these claims will not raise any separate factual issue. It seems to be accepted that, if Warman establishes that the applicant's actions infringe its copyright, this will constitute a defence to all of the claims made by the applicant; and, conversely, that if it does not do this, the applicant would be entitled to succeed in the proceeding, both in relation to the claim under s.202 of the Copyright Act and the claims under ss.52 and 53(g) of the Trade Practices Act. I should add that the respondents have not only filed a defence. They have also filed a cross-claim. In that cross-claim the respondents assert their entitlement to the copyright in the relevant drawings and they allege various infringements by Amalgamated Mining; the alleged infringements being constituted by reverse-engineering rather than by copying the drawings themselves.

12. It seems to me that this is a case within the principle adopted in the authorities to which I have referred. The case is perhaps not as strong as in Willey v Synan, where the plaintiff was forced to take proceedings or lose any subsequent claim to the money which had been taken from him by the Customs Department. However, in a practical sense, the present applicant has been forced to take legal action. The letter which was sent to QMS was a carefully drafted letter. The recipient of that letter must have realized that Warman had taken legal advice and there is a clear threat in the letter to take legal proceedings against QMS unless the required undertakings were granted.

13. I do not know the extent of the use by QMS of parts acquired from Amalgamated Mining. It may be that QMS feels that the amount of business it obtains through the sale of those parts is insufficient to justify becoming involved in any legal action against Warman. Whether or not this is so, it is not hard to see that the result of the receipt of such a letter may be to dissuade QMS from dealing with Amalgamated Mining in respect of pump parts. Indeed, this was the express purpose of the letter. The effect, of course, is to deny to Amalgamated Mining at least one customer, and there is a possibility that similar letters may be sent to other customers of Amalgamated Mining. The claim made by Warman puts Amalgamated Mining in the position either of suffering losses of sales of those pump parts or of going to court to assert its rights. Section 202 of the Copyright Act seems to me to have been expressly designed to cater for such a situation: to allow a person against whom threats have been made to come to court to have the matter clarified. That section expressly confers upon the party asserting the copyright and infringement the obligation to make good those claims.

14. If one applies the homely test adopted by Scrutton L.J. of asking who, in the litigation, was the attacker and who was the defender, I think it must be said that the first attack came in the letter from by Phillips Fox. Although the letter was not written directly to Amalgamated Mining, it is that company which has an interest in defending and, in a commercial sense, probably has very little alternative other than to take that course. I think that it is an accurate analysis of the matter to say, therefore, that it is the respondents to the principal proceeding who are the attackers and that Amalgamated Mining is, in substance, the defender.

15. So analyzed, it seems to me that the principle which was applied in the cases to which I have referred equally applies in the present case. It dictates the conclusion that the application for an order for security for costs should be refused. It follows that I should dismiss the notice of motion. The respondents in the principal proceedings must pay the costs of the applicant in the principal proceeding to the notice of motion.