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Federal Court of Australia |
Last Updated: 14 February 2007
FEDERAL COURT OF AUSTRALIA
The University of Western Australia v Gray (No 9) [2007] FCA 111
PRACTICE AND PROCEDURE –
cross-claim – against third party – leave to bring cross-claim
– subject matter of
cross-claim related to or connected with the subject
of the proceeding – case management considerations – long complex
trial imminent – complexity increased by introduction of additional party
– possibility that cross-claim may be unnecessary
– leave to
cross-claim refused
THE UNIVERSITY OF WESTERN AUSTRALIA
v BRUCE NATHANIEL GRAY
SIRTEX MEDICAL LIMITED (ACN 078 166 122) AND
CANCER RESEARCH INSTITUTE INCORPORATED (REG NO 1001005)
BRUCE
NATHANIEL GRAY v THE UNIVERSITY OF WESTERN AUSTRALIA AND YAN
CHEN
SIRTEX MEDICAL LIMITED (ACN 078 166 122) v THE UNIVERSITY OF
WESTERN AUSTRALIA
SIRTEX MEDICAL LIMITED (ACN 078 166 122) v BRUCE
NATHANIEL GRAY and CANCER RESEARCH INSTITUTE INCORPORATED (REG NO
1001005)
WAD292 OF 2004
FRENCH J
13 FEBRUARY
2007
PERTH
THE COURT ORDERS THAT:
1. The first respondent’s motion filed 26 September 2006 is dismissed.
2. The first respondent is to pay the proposed cross-respondents’ costs of the motion.
Note: Settlement and entry of orders
is dealt with in Order 36 of the Federal Court Rules.
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BETWEEN:
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THE UNIVERSITY OF WESTERN AUSTRALIA
Applicant |
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AND:
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BRUCE NATHANIEL GRAY
First Respondent SIRTEX MEDICAL LIMITED (ACN 078 166 122) Second Respondent CANCER RESEARCH INSTITUTE INCORPORATED (REG NO 1001005) Third Respondent BRUCE NATHANIEL GRAY First Cross-Claimant THE UNIVERSITY OF WESTERN AUSTRALIA First Cross-Respondent to First Cross-Claim YAN CHEN Second Cross-Respondent to First Cross-Claim SIRTEX MEDICAL LIMITED (ACN 078 166 122) Second Cross-Claimant THE UNIVERSITY OF WESTERN AUSTRALIA Cross-Respondent to Second Cross-Claim SIRTEX MEDICAL LIMITED (ACN 078 166 122) Third Cross-Claimant BRUCE NATHANIEL GRAY First Cross-Respondent to Third Cross-Claim CANCER RESEARCH INSTITUTE INCORPORATED (REG NO 1001005) Second Cross-Respondent to Third Cross-Claim |
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JUDGE:
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FRENCH J
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DATE:
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13 FEBRUARY 2007
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PLACE:
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PERTH
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REASONS FOR JUDGMENT ON LEAVE TO CROSS-CLAIM AGAINST NON-PARTIES
Introduction
1 Dr Bruce Gray, a former Professor in the Faculty of Medicine at the University of Western Australia (the University) is sued by the University by reason of his alleged exploitation and assignment of intellectual property rights relating to inventions developed while he was in the employment of the University. The University alleges that Dr Gray and a public company, Sirtex Medical Ltd (Sirtex) hold rights and entitlements deriving from the inventions on trust for the University. Dr Gray is the first respondent in these proceedings. Sirtex is the second respondent. Also sued is the Cancer Research Institute Incorporated (CRI), named as third respondent. CRI has a substantial shareholding in Sirtex which the University asserts is impressed with a trust in its favour. The inventions the subject of the litigation involve methods for the production of hollow microspheres for the delivery, to cancerous sites in the human body, of ionising agents and pharmaceutically active compounds (SIRT-spheres and DOX-spheres respectively). Another alleged invention comprises microspheres incorporating ferromagnetic particles which by application of magnetic fields can provide localised heating in cancerous tissues (Thermo-spheres).
2 Sirtex filed a defence to the University’s claim against it stating, inter alia, that it relied upon warranties and representations made by Dr Gray about its uncontested title to the relevant intellectual property rights. It says, in effect, that it was not fixed with any knowledge of the University’s assertions of its beneficial entitlement. As a fall-back position Sirtex cross-claimed against Dr Gray and CRI claiming that if it is held liable to the University then it is entitled to be indemnified by Dr Gray and CRI and, alternatively, to damages for misleading or deceptive conduct on their part.
3 Dr Gray now seeks leave to cross-claim against partners of the formerly Melbourne-based law firm Freehill Hollingdale & Page (Freehills) as it was composed in 1997 and 2000. The proposed cross-claim would allege that Freehills was engaged by Sirtex in 1997 and 2000 to undertake due diligence work in connection with the formation of Sirtex as a public company and its subsequent preparation of an initial public offering and listing on the Australia Stock Exchange (ASX). Dr Gray says that if he is liable to Sirtex because the University’s claim to the disputed intellectual property rights succeeds, then it would follow that Freehills (1997) and Freehills (2000) were in breach of their duty to Sirtex in performing their due diligence functions. Further, he would allege that Freehills misled him (albeit not deliberately) and that he is entitled to damages from the former partners.
4 In my opinion the cause of action raised against Freehills could be
brought as a cross-claim. However, because of the difficulties
to which this
would give rise as a matter of case management, even with a separate trial, I
consider the better course is for Dr
Gray to commence a distinct action against
Freehills. His application for leave to cross-claim against them will be
refused.
The nature of the cross-claim against Dr Gray
5 In its defence to the University’s claim Sirtex says it was incorporated in April 1997 in order to raise money for the development of the cancer treatment technologies. Pursuant to a deed made in 1997 (the Gray Deed) Dr Gray assigned to Sirtex certain assets including his interests in inventions described in the deed. Similar assignments were made by CRI and Australian Surgical Products Ltd (ASPL).
6 Sirtex says, in its defence that, under the Gray Deed, Dr Gray warranted that all the patent and intellectual property rights material to its business, including the inventions acquired under all three deeds, were legally and beneficially vested in Sirtex, valid and enforceable, were not being infringed or attacked or opposed by any person and were not subject to any licence or authority in favour of another. He also warranted that to the best of his knowledge after making all due inquiries, there were no pending claims or applications in respect of the patents, know-how, rights or intellectual property rights in any of the acquired inventions or the subject matter of any of them other than the patent applications transferred to Sirtex by the Gray Deed and the CRI Deed. Sirtex pleads that, under the Gray Deed, Dr Gray represented and warranted that the warranties provided in the Subscription and Shareholders Agreement were true and accurate and not misleading in any respect. He is also said to have indemnified Sirtex against any claim for which it was liable in respect of any breach of the representation and warranty contained in the Gray Deed.
7 In [171] of its defence, Sirtex says that if (which is not admitted) Dr Gray was in breach of any fiduciary or contractual duty to the University or any duty pursuant to the patent regulations or the intellectual property regulations then Sirtex did not have actual knowledge of those matters and was not put under inquiry as to them. It was not fixed with the knowledge of Dr Gray with respect to those matters.
8 In its cross-claim against Dr Gray and CRI Sirtex repeats the warranties which it pleads, in the defence, were made by Dr Gray. It says that if the University is beneficially entitled to the acquired inventions then Dr Gray and CRI breached warranties given by each of them and each of the pleaded representations made by them was false and misleading to Sirtex. Sirtex says it would be entitled to be indemnified by Dr Gray in respect of any breach by him of his warranties. An alternative plea is made of misleading or deceptive conduct in breach of s 10 of the Fair Trading Act 1987 (WA). The cross-claim by Sirtex against Dr Gray and CRI is for damages under s 79 of the Fair Trading Act and for an indemnity in respect of damages, losses, liabilities and costs incurred by it as a result of the University’s claim.
9 Dr Gray now seeks leave to raise a cross-claim against the partners, in 1997 and 2000 respectively, of the law firm Freehills in Melbourne. He defines the first set of former partners as "Freehills (1997)" and the second set as "Freehills (2000)". All are listed as proposed cross-respondents in his reamended minute of proposed third cross-claim. He alleges in the minute that Freehills (1997) caused Sirtex, formerly known as Paragon Medical Ltd (Paragon), to be incorporated as a public company on 21 April 1997. It changed its name to Sirtex on or about 3 April 2000. Sirtex is said to have engaged Freehills (1997) to:
‘11.1. act as its legal advisors.
11.2 to undertake a due diligence on the proposed purchase by Sirtex of certain assets as pleaded in paragraph 14 from Dr Gray, Cancer Research Institute (CRI) and Australian Surgical Products Ltd (ASPL);
11.3 subject to a satisfactory due diligence, to prepare all necessary documents and agreements to effect a transfer of those assets to Sirtex and a capital raising of $3,000,000 by the issue to Nomura of 1,499,999 ‘A’ class preference shares at a premium of $1.80 per share and 1 ‘C’ class preference share at a premium of $1.80 in Sirtex pursuant to a written Subscription and Shareholders Agreement undated but made in May 1997.’
10 Dr Gray alleges that by the material terms of its retainer Freehills (1997) was required to:
‘12.1. review the patent specifications for the background and nature of the inventions pleaded in paragraph 14;
12.2. review the validity and inventiveness of the inventions pleaded in paragraph 14, including undertaking a review of the prior art of the inventions the subject of the patents;
12.3 check the medical patentability of the inventions in other countries;
12.4 prepare documents to assign the intellectual property to Sirtex; and
12.5 advise Sirtex on any matters that might affect Sirtex’s title to the intellectual property of which it was taking an assignment;
12.6 Provide advice to Sirtex on steps Sirtex should take to obtain good title to the intellectual property of which it was taking and (sic) assignment.’
11 On or about 1 May 1997 following the carrying out by Freehills (1997) of its contracted services Dr Gray, CRI and ASPL assigned certain assets to Sirtex. These were said to comprise, inter alia, intellectual property rights defined in a deed of assignment. Dr Gray says he gave certain warranties and assurances to Sirtex about the intellectual property that CRI and ASPL assigned to it. Under the terms of the deed he was allotted 1,028,333 "A" ordinary shares and 341,662 "B" ordinary shares in Sirtex in satisfaction of a consideration of $2,739,999. CRI was allotted 433,332 "B" shares. ASPL received $100.
12 Freehills (1997) is said to have owed Sirtex a duty to:
‘17.1 make all reasonable inquiries to ascertain:
17.1.1 whether or not Dr Gray, CRI and ASPL could validly assign and give good title in the Intellectual Property to Sirtex;
17.1.2 whether any third party, including UWA, asserted an interest in the Intellectual Property, contrary to that of Dr Gray, CRI and ASPL;
17.1.3 whether the Intellectual Property was supported by a valid patent, the assignment of which could be taken by Sirtex;
17.1.4 whether any warranty given by Dr Gray, CRI or ASPL was either untrue or misleading.’
Freehills (1997) was also said to have owed Sirtex a duty of care to advise it of steps it ought to take to obtain good title to the intellectual property.
13 If the warranties pleaded by Sirtex in its defence and cross-claim are found to be untrue or misleading then, according to Dr Gray’s proposed cross-claim, it will be because Freehills (1997) was in breach of its retainer and its duty of care in that it:
‘19.1 failed to make enquiries of CRI, ASPL or Dr Gray of the existence of any correspondence passing between them and any third party such as UWA about the Acquired Inventions;
19.2 failed to make enquiries of Dr Gray of all correspondence he had received providing the opinion of any patent attorney about the patentability and ownership of any of the Acquired Inventions and the Intellectual Property;
19.3 failed to make enquiries of Dr Gray of all correspondence that he had had with UWA about ownership of all or some of the Acquired Inventions and the Intellectual Property.’
Specific correspondence in 1994 and 1997 said to have raised questions about the intellectual property should have been identified by Freehills (1997). Dr Gray alleges that Freehills (1997) failed to inform Sirtex of that correspondence. Had Freehills (1997) cited the correspondence then, according to Dr Gray’s pleading, it would, as a legal practitioner, have had a duty, as part of the due diligence process, to recommend that Sirtex obtain releases from the University to any claim to the intellectual property. Dr Gray says that because of its failure to perform its retainer completely Freehills (1997) was in breach of its duty to Sirtex. As a result Sirtex completed its purchase of the intellectual property and entered into the Subscription and Shareholders Agreement.
14 Dr Gray then pleads that in January 2000 Sirtex engaged Freehills (2000) to carry out the due diligence process in relation to its public offering and ASX listing. It was a term of the retainer that Freehills (2000) would "investigate and advise" Sirtex on the validity of the assets of Sirtex including the intellectual property then registered in its name. Dr Gray alleges that by material terms of the second Freehills’ retainer, Freehills (2000) was required to:
‘26.1 review the patent specifications for background and nature of the inventions pleaded in paragraph 14;
26.2 review the validity and inventiveness of the inventions pleaded in paragraph 14, including undertaking a review of the prior art of the inventions the subject of the patents;
26.3 check the medical patentability of the inventions in other countries; and
26.4 advise Sirtex on any matters that might affect Sirtex’s title to the Intellectual Property.’
15 Freehills (2000) is said to have owed a duty to Sirtex to make all reasonable inquiries to ascertain whether or not Dr Gray, CRI and ASPL had validly assigned and given good title in the intellectual property to Sirtex, whether any third party including the University, asserted an interest in the intellectual property, whether Sirtex had taken a valid assignment of the intellectual property and whether any warranty given by Dr Gray, CRI or ASPL was either untrue or misleading. It is also said that Freehills (2000) should have undertaken reasonable inquiries to determine whether Sirtex should seek any further releases from the University as to its ownership of the intellectual property.
16 Dr Gray alleges that in breach of its retainer and of its duty of care Freehills (2000):
‘31.1 failed to make enquiries of CRI, ASPL or Dr Gray of the existence of any correspondence or communications passing between them and any third party, such as UWA, about the Acquired Inventions;
31.2 failed to make enquiries of Dr Gray of all correspondence or communications he had received providing the opinion of any patent attorney about the patentability and ownership of any of the Acquired Inventions and the Intellectual Property;
31.3 failed to make inquiries of Dr Gray of all correspondence or communications that he had had with UWA about ownership of all or some of the Acquired Inventions and the Intellectual Property.’
17 Because of these admissions it is said that Freehills (2000) failed to identify and to inform Sirtex of correspondence which ought to have led it to recommend that Sirtex obtain releases to any claim to the intellectual property from the University as part of the due diligence process. Freehills (2000), he says, failed to find out that the University might assert an interest in some of the intellectual property. They did not advise Sirtex as they ought to have. Other related breaches of duty are also alleged.
18 Dr Gray alleges that if the University succeeds in its action against Sirtex, Sirtex will suffer loss and damage. Freehills (1997) and Freehills (2000), if sued by Sirtex, will be liable to it for damages as a tortfeasor in respect of any loss suffered because of the judgment in favour of the University. Dr Gray says that ss 7(1)(c) and 7(2) of the Law Reform (Contributory Negligence and Tortfeasors Contribution) Act 1947 (WA) have the effect that, if he is liable to Sirtex, he is entitled to recover from Freehills (1997) and Freehills (2000) such sum as the Court shall think fit in respect of any liability he is judged to have to Sirtex.
19 There follows a separate pleading that if Dr Gray is liable to the University then he is liable as a result of breaches of a duty of care owned to him by Freehills (1997) in failing to make inquiries relevant to the existence of correspondence raising a question about whether the University would assert an interest in some of the intellectual property. Alternatively he says that in failing to advise him to obtain releases from the University, Freehills (1997) breached its duty to him.
20 Dr Gray pleads that Freehills (1997) engaged in conduct that was misleading or deceptive in contravention of s 9 of the Fair Trading Act 1999 (Vic) and, alternatively, s 10 of the Fair Trading Act (WA). This is said to have arisen out of implied representations that:
1. The release in the Barber letter constituted an effective release from all or any claims that the University might have to the intellectual property.
2. No further releases from the University were necessary under the Patents Regulations or the Intellectual Property Regulations in order for Dr Gray not to be at risk of suit by the University in relation to the title in the intellectual property.
In the event that the
University’s claim is successful then by reason of Freehills (1997)
conduct, according to Dr Gray, he
would be exposed to loss or damage.
21 Dr Gray also pleads that Freehills (2000) owed a duty of care to him to
provide advice to protect him from harm including exposure
to the risk of
liability under the Subscription and Shareholders Agreement and the Gray Deed.
Freehills (2000) is said to have failed
in its duty by not advising him to seek
any release from the University or any assurance from the University in addition
to the contents
of a letter written by Professor Barber. He claims against both
Freehills (1997) and Freehills (2000) damages at common law and,
alternatively,
pursuant to the Fair Trading Acts of Victoria and Western Australia, a
sum equal to any judgment against him and of the costs of defending those
proceedings.
Contentions about leave to cross-claim
22 In an affidavit sworn by Ms Hughes, one of Dr Gray’s solicitors, it is said that if he is granted leave against Freehills (1997) and Freehills (2000) then he will also seek orders that parties to the cross-claim be permitted to participate in the trial of the main action but that the trial of the cross-claim proceed separately and after the main action. Among the documents exhibited to the affidavit, some of which seem to have been unnecessarily exhibited, were copies of the correspondence which it was said that Freehills (1997) and Freehills (2000) should have identified and which should have formed the basis of advice to Sirtex.
23 In a letter dated 30 December 1994 Dr Yan Chen wrote to Dr Gray attaching a letter dated 21 December 1994 from patent attorneys, Wray & Associates, from whom she had sought professional advice in relation to the assignment and ownership of associated intellectual property. The patent attorneys said they understood that the bulk of the experimental work carried out in respect of the invention called "Controlled Release Preparation" was conducted while Dr Chen was an employee of the University either directly or indirectly through Royal Perth Hospital. They said:
‘On the basis of the circumstances outlined above we believe that the intellectual property of the present invention resides with UWA. The reason being that Professor Gray and yourself arrived at the invention whilst under the employ of the University. In these circumstances, and unless there is a separate agreement to the contrary, the intellectual property of an invention which arises in the course of an employee’s usual duties automatically belongs to the employer. As such we suggest that you undertake discussions with the University to confirm the ownership of the present invention and any rights that you may have as an inventor.
Indeed, if it is proven that UWA is the owner of the intellectual property any assignment documents that you may sign may be void. If UWA is the owner then it will be necessary for an authorised officer of the University to assign the invention to the Cancer Research Institute.’
24 A letter from Dane Gorn, the Chairman of CRI in 1997, to Professor M Barber, then Deputy Vice Chancellor of Research at the University and dated 17 January 1997 stated, inter alia:
‘As we are currently negotiating for venture capital funding we need to state very clearly that the University has no financial or other interests in the intellectual property that we intend developing. The venture partner has requested that everyone we have associated with provide witness statements declaring they have no claim on the technology before any contract with the CRI could be undertaken.’
A form letter of release was attached. Professor Barber returned the release letter bearing his signature on 22 January 1997. That letter was in the following terms:
‘I confirm that, on the basis of the facts in your letter, the University has no interest financially or otherwise in the CRI funded technology (or intellectual property in it) described in your letter and referred to as:
(a) the use of small ceramic particles to treat patients;
(b) the use of new matrix for transport of an anti-cancer drug;
(c) the use of targeted hyperthermia in the treatment of patients.’
25 On 20 February 1997 Professor Barber wrote to Professor Gray a letter in which he said he had been reflecting upon conversations they had had in the preceding months about the commercialisation of intellectual property arising from Dr Gray’s research activities. Professor Barber said he had raised concerns about the potential for conflict of interest to arise in Dr Gray’s various roles. He went on:
‘In the most recent case concerning identification of intellectual property ownership between the Cancer Research Institute and the University of Western Australia, I was in the end convinced that our interest was negligible. In the future I rather doubt if they will be as clear cut.
Thus I believe a clear statement from you concerning your various roles is necessary. In particular I understand, although I do not believe you have ever advised me, that you are a director of Paragon Medical Ltd. This does raise the potential for a conflict of interest in any dealings I have with you on Paragon/Cancer Research Institute/University of Western Australia issues.’
He also stated his presumption that Dr Gray had sought approval from the Vice Chancellor as required by the University’s policy on academic, professional and consultative work.
26 Dr Gray wrote back to Professor Barber on 5 March 1997. He said that he had been Medical Director of the Lions Cancer Institute and CRI, both of which were unpaid positions. He had not derived any income or benefit from any institution or company that he had been associated with during his employment with the University. Paragon had been little more than a shell company up to that time. In the letter he indicated that he was aware there could be some conflict of interest and had arranged to reduce his position from fulltime to 0.3 fractional fulltime.
27 On 17 June 1999 the Vice Chancellor of the University, Professor Schreuder wrote to Dr Gray informing him that the Anti-Corruption Commission had determined to refer to the University for investigation or other action allegations against Dr Gray that, while an employee of the University with clinical privileges at Royal Perth Hospital, he may have engaged in conduct which showed a conflict between his duty to his patients and employer and his interests arising from his position as a director and shareholder in Paragon. In the letter Professor Schreuder said, inter alia:
‘Would you explain the origin of the intellectual property rights in the microsphere technology, now allegedly owned by Paragon Medical Ltd and provide particulars of any purported transfer of intellectual property rights to that company. If you allege that the intellectual property was created outside your employment by the University, please indicate where the work was conducted and at what time.’
28 Freehills (1997) and Freehills (2000) were represented at the application for leave to bring the cross-claim. An affidavit sworn by Kon Mellos on 22 November 2006 was relied upon. Mr Mellos is a partner in Freehills. He joined the Melbourne firm of Freehills in March 1994 and became a partner on 1 July 1998. No contention was advanced that it was not identical with the firm comprising the persons listed in the schedule. If there be any disparity in particular names that does not go to the procedural question with which I am concerned here. Freehills (1997) was a partnership distinct from the firm carrying on the business under the name Freehill Hollingdale & Page in New South Wales, Queensland and Western Australia. At the time of the 1997 transaction Mr Mellos was a senior associate at Freehills (1997) and acting under the general supervision of a partner of that firm.
29 Mr Mellos said that a Singapore company, Nomura/JAFCO Investments (Asia) Ltd (Nomura) gave Freehills (1997) instructions to act for it in relation to the acquisition of an interest in technologies owned by Dr Gray and the CRI. The Nomura senior executive who was described by Mr Mellos as "the principal driver of the 1997 transaction" was Dr Michael Panaccio. According to Mr Mellos, Dr Panaccio requested that the 1997 transaction be effected by investment in a new company to be incorporated and to which relevant intellectual property would be assigned. Upon that investment the company would be owned in equal shares between Dr Gray or associated entities, CRI and entities managed by Nomura.
30 Mr Mellos said that Dr Panaccio requested that the costs of the due diligence and documentation be shared equally between the new company and Nomura. So far as patent review was concerned he was very specific that he only sought an appraisal of the patents on their face and not a thorough review of the relevant underlying intellectual property itself that was the subject of the patents. He requested that a new company be incorporated and that funds managed by Nomura would be invested in it as part of the 1997 transaction rather than being put into a pre-existing company owned by Dr Gray and his associated entities. This was to avoid the costs of having legal due diligence performed on a pre-existing company. Mr Mellos said that Nomura did not require Freehills (1997) to conduct a full due diligence and it was instructed not to do so. He said:
‘There was to be no legal due diligence, save for basic patent appraisal work that was to be performed. No instructions were received from Paragon.’
31 Freehills (1997) and its associated firm of patent attorneys, called Freehills Patent Attorneys, were not required to do any further work in respect of the patents on the 1997 transaction other than preparing or negotiating documents governing their assignment to the new company to be created. Dr Gray was represented by Blakiston & Crabb, a Perth-based firm of solicitors. They drafted the deed by which he assigned his intellectual property rights to Paragon. The deed was based on a document prepared by Freehills (1997).
32 Mr Mellos said that the involvement of Freehills (1997) in the 1997 transaction ceased when Sirtex was incorporated and all relevant agreements in relation to its incorporation and initial equity financing had been signed and the financing had been completed. There was no formal meeting for the execution of the documents for the 1997 transaction. They were sent to the various people that needed to sign them. As far as Freehills (1997) was concerned the 1997 transaction was then at an end and they ceased to act for Nomura on that matter.
33 Mr Mellos then described what he called the 2000 transaction. In early January 2000 Dr Panaccio, acting as a director of Sirtex, invited Freehills (2000) to put a proposal to Sirtex for the provision of legal services in respect of its proposed initial public offer and listing on the ASX. I shall again assume the identity of the parties comprising the Melbourne law firm as it stood in 2000 and the firm Freehills (2000) as defined elsewhere in these reasons. On 13 January 2000 Freehills (2000) was engaged by Dr Gray on behalf of Sirtex in relation to the 2000 transaction. It was instructed to conduct legal due diligence although this was not to include a detailed history of the development of the technology that was the subject of the inventions.
34 A due diligence committee was convened comprising Drs Gray and Panaccio from Sirtex, Mr K Kerridge from KTM Capital Pty Ltd underwriting the intellectual property, Mr Mellos as chairman of the committee, Mr Davey, then a senior associate of Freehills (2000) and Peter Messer from Deliotte Touche Tohmatsu. According to Mr Mellos, Sirtex did not want two partners in Freehills (2000) or Freehills Patent Attorneys on the due diligence committee as a transaction of that size did not warrant the cost that would have been involved.
35 A meeting of the due diligence committee on 11 February 2000 discussed intellectual property issues. The minutes of the meeting, exhibited to Mr Mellos’ affidavit, show that Dr Panaccio suggested that the prospectus for the initial public offer should disclose that the University had not claimed any intellectual property rights over the spheres. Dr Gray is recorded as noting that a further intellectual property issue had also been discussed briefly with Mr Cherry of Freehills (2000) who wanted more time to consider the matter. The issue related to the property in the results of clinical trials conducted at the University while Dr Gray was working there. They were conducted in an academic context. Mr Mellos said that it would be a time consuming and possibly inconclusive process to determine the ownership of the trial results. They would have to review the policy of the University, the terms of engagement of Dr Gray and other agreements governing the ownership of intellectual property generated within the University. Mr Mellos queried whether a commercial agreement could be reached with the University as an alternative to such a review. Dr Gray is recorded as saying that the University had previously provided a confirmation to the CRI that it had no claims and would not make any claims in the future in relation to ceramic microspheres, DOX-spheres or hyperthermia. This was apparently a reference to the letter from Professor Barber referred to earlier. Dr Gray said he would write to a Dr Burton at CRI who had been involved with the development of the resin microspheres during the 1980s to seek his confirmation that no claim would be made by him in relation to the ceramic microspheres used by the company.
36 Mr Mellos said that the exchange of correspondence between CRI and Dr Barber in January 1997 indicated to Freehills (2000) that the University had no underlying claim in respect of the clinical trials data or the underlying intellectual property. Freehills (2000) was not provided with any correspondence in relation to any potential interest that the University might have had in either the clinical trials or the underlying intellectual property other than those two letters.
37 Due diligence questionnaires were issued, including a questionnaire sent to Dr Gray on 3 February 2000. A copy was exhibited to Mr Mellos’ affidavit. Supplementary questionnaires were sent to Dr Gray on 18 February 2000, 9 March 2000 and 23 March 2000. On 10 July 2000 a "refresh" questionnaire was sent to him. Dr Gray answered in the negative a number of questions asking if there were any matter adversely affecting any intellectual property or rights under any licence of intellectual property to the company or any group company.
38 The due diligence committee prepared a report which was based in part on the answers to the questionnaires. Members of the committee took responsibility for the verification of particular statements in the prospectus. According to Mr Mellos the verification notes demonstrate that it was the responsibility of Dr Gray to verify all statements in relation to intellectual property. Before issuing the prospectus all the directors of Sirtex, including Dr Gray, were required to sign a document entitled "Director’s Sign Off and Consent" by which they verified that none of the statements in the prospectus were misleading or deceptive to their knowledge and that there were no other matters that ought to be disclosed.
39 The 2000 transaction came to an end from the point of view of Freehills
(2000) upon the listing of Sirtex on the ASX. Mr Mellos
pointed out that the
firm which now carries on business as Freehills is not the same as Freehills
(2000). It was formed with effect
from 1 July 2000 as a result of the merger of
the separate partnerships of Freehill Hollingdale & Page Sydney (which
included
Brisbane), Melbourne and Perth. The national partnership did not
assume any obligation or liability of any of the previous
partnerships.
Statutory framework – the Rules of Court
40 Order 5 r 1 provides, inter alia, in subrules (2) and (3):
‘(2) A respondent may cross-claim against any person whether another party or a third party for any relief which is related to or connected with the subject of the proceeding.
(3) Without prejudice to the generality of sub-rule (2), a respondent may cross-claim for contribution or indemnity.’
41 Order 5 r 8 provides:
‘(1) Subject to sub-rules 9(1) and (2), a respondent may cross-claim against an applicant or any other party without the leave of the Court, but may not cross-claim against any other person not being a party without such leave.
...
(3) A cross-claim shall be in or substantially in the forms numbered 8 or 9 in Schedule 1, and shall be accompanied by an affidavit stating –
(a) the nature of the cross-claim;
(b) the material facts on which the cross-claimant relies; and
(c) the facts showing that the cross-claim is one to which rule 1 of this Order applies.’
42 Order 5 r 9 provides:
‘(1) A respondent desiring to cross-claim after the directions hearing shall obtain all necessary directions at the directions hearing in relation to the cross-claim, including the time within which the cross-claim is to be filed.
(2) A respondent who does not obtain directions pursuant to sub-rule (1) shall not cross-claim after the directions hearing without the leave of the Court.’
43 Order 5 r 11 requires that subject to that Order and Order 11, a proceeding on a cross-claim follow as nearly as may be the course of the proceeding on the originating process in respect of which the cross-claim is filed (O 5 r 11(1)). Rule 11(7) provides:
‘Subject to this Order, the trial or hearing and all other steps in the proceeding on the cross-claim shall as far as practicable be carried on together with the trial or hearing and similar steps in the proceeding on the originating process in respect of which the cross-claim is filed.’
44 Notwithstanding the above, O 5 r 12 gives the Court a wide discretion in the directions it may make as to the conduct of a cross-claim. Rule 12(2) provides, inter alia:
‘On any directions hearing, or on the trial or hearing of the cross-claim, the Court may –
(a) make any order or direction it may make under Order 10 (which relates to directions hearings);
(b) order that any claim, question or issue in or arising on the cross-claim be tried in such manner as the Court may direct;
...
(d) give to a respondent to the cross-claim leave to appear at the trial or hearing of the claim on the originating process or on any other cross-claim in the proceeding and to take such part in the trial or hearing as the Court thinks fit;
...
(f) determine the extent to which the cross-claimant and a respondent to the cross-claim shall be bound as between themselves by a judgment (including a judgment by consent or by default) or decision (including a decision by consent) on the claim on the originating process or any other cross-claim in the proceeding;
...
(h) give such directions as the Court thinks fit for having the rights and liabilities of the parties determined and enforced, including any order or direction which may be made or given under this Order.
...
15. A cross-claim may proceed notwithstanding that judgment has been pronounced and an order made and entered on the originating process or any other cross-claim in the proceeding, or that the proceeding on the originating process or any other cross-claim is staved, dismissed or discontinued.’
Whether Dr Gray should be given leave to cross-claim against Freehills (1997) and Freehills (2000)
45 As the preceding review of the relevant pleadings and the evidence indicates, the necessary condition that the proposed cross-claim seeks relief "related to or connected with the subject of the proceeding" is satisfied. There were some criticisms advanced from Freehills about the viability of certain aspects of the cross-claim. It was suggested that Dr Gray’s reliance upon the Law Reform (Contributory Negligence and Tortfeasors Contribution) Act was misconceived. The causes of action relied upon by Sirtex in its cross-claim against Dr Gray were said not to be actions in tort, but for breaches of contract and misleading or deceptive conduct contrary to the Fair Trading Act. If Sirtex were not claiming against Dr Gray as a tortfeasor then he could hardly join Freehills as a joint tortfeasor. There may be a question also whether the relevant statutes are the Western Australian ones cited or their Victorian equivalents. This is not particularly vital at this stage as there are causes of action raised against Freehills (1997) and Freehills (2000) which, on the face of it, are not manifestly untenable nor without any reasonable prospect of success. They are, however, distinct causes of action based upon duties said to be owed not only to Sirtex but also directly to Dr Gray.
46 The materials presently before the Court do not indicate that Dr Gray has a strong case against Freehills (1997) and Freehills (2000). But the opposition to the cross-claim was not put upon the basis that it had no reasonable prospect of success. It was not proposed that leave to cross-claim should be refused on the basis that if granted the cross-claim could be disposed of summarily. The question of leave to cross-claim therefore largely reduces to a matter of case management.
47 There are a number of options open to the Court dealing with the application for leave to cross-claim. They are:
1. To give leave to cross-claim and to direct that the trial of the cross-claim be heard concurrently with the trial of the primary action, with evidence in the claim to be evidence in all cross-claims and vice-versa.
2. Give leave to cross-claim but order a separate trial of the cross-claim with leave to Freehills’ counsel to participate in the primary proceedings to the extent necessary to enable the Freehills’ respondents to resist findings of the primary liabilities as between the University and Sirtex and between Sirtex and Dr Gray upon which the causes of action asserted against them ultimately rest.
3. Give leave to cross-claim and order a separate trial with no presumption that the findings of fact in the primary proceedings will be adopted at the trial of the cross-claim.
4. Refuse leave to cross-claim, albeit Dr Gray would be free to pursue his cross-claim by separate proceedings against Freehills (1997) and Freehills (2000).
48 The first option, which would involve hearing the cross-claim as part of the trial of the primary action is plainly not practicable. The allegations raised against Freehills (1997) and Freehills (2000) involve new issues going to the contractual arrangements entered into between the Freehills’ respondents and Sirtex, the performance of the retainers, the operation of the due diligence committee and the role of Dr Gray on it. Questions of reliance and causation in connection with the effect of the alleged conduct or inaction by the Freehills’ respondents on any loss suffered by Sirtex and Dr Gray would attract their own paper and evidentiary trail. The potential for additional discovery and inspection processes is significant. The trial of the matter is imminent. It is listed for up to eight weeks commencing 12 March 2007. It is not reasonable to expect the Freehills’ respondents to be in a position to defend the cross-claim within that time. This option is, in any event, not proposed by any party.
49 The question then arises whether the cross-claim could proceed with a separate trial on the basis that the Freehills’ respondents have leave to be represented at the trial of the primary action so that they can, if they wish, join in contesting the primary claim and the Sirtex cross-claim upon which the proposed cross-claim against them depends. While it might be expected the role of competent legal representatives for the Freehills’ respondents at trial would be economical and supplementary to that of the principal protagonists, there is nevertheless an inescapable risk of further complication of an already complicated action and extension of the duration of the trial. It would require representatives of the Freehills’ respondents to be in a position to make effective forensic judgments about the scope of their involvement at various points in the trial. To do so it is likely they would have to master a large amount of material already disclosed in the discovery process between the principal parties. While it may be possible to define issues reserved to the separate hearing of the cross-claim which would not be determined by the findings in the primary proceedings, such definitions can give rise to debate about their limits.
50 In my opinion, given the stage which the proceedings have reached, the introduction of an additional party into the hearing, even if the cross-claim itself were to be separately tried, is likely to unduly complicate and extend the trial. While it is desirable that all aspects of a matter before the Court should be finally resolved the Rules of Court recognise that where cross-claims against non-parties are proposed there is a proper discretion to limit the scope of the litigation and that the Court is not obliged to deal with an ongoing chain of dependent proceedings as part of the same matter.
51 If the University succeeds in its claims against Dr Gray and Sirtex and Sirtex then succeeds in its cross-claim against Dr Gray, he may decide to institute separate proceedings against the Freehills’ respondents. Those respondents would not be bound by the findings in the primary proceedings and it may be open to contest issues of fact and law dealt with by those findings. However they could well do so at the risk of adverse costs orders if the same findings were reached, notwithstanding that they succeeded in defending the claims against them by Dr Gray. There is, I think, a reasonable prospect that a degree of commonsense would apply to the question whether findings in the primary proceedings were disputed in subsequent proceedings against the Freehills’ respondents. On the other hand, if the University fails in its claims against Dr Gray or if Sirtex fails in its cross-claim against Dr Gray, the proposed proceedings against the Freehills’ respondents would, in all likelihood, become unnecessary.
52 I appreciate that some of the preceding considerations are applicable to
a large range of cases in which leave is sought to cross-claim
against a non
party. But it is their particular application to this case that is relevant
here. In my opinion, however, in the
circumstances of this case, the granting
of leave would be likely to add to the complexity and costs of the proceedings
and possibly
to the duration of the trial. I see no advantage in the third
option of giving leave to cross-claim on the basis that it could be
heard
separately and that the parties to it are not bound by the findings at trial. I
propose therefore to refuse leave to cross-claim.
Conclusion
53 Dr Gray’s motion for leave to cross-claim against Freehills (1997)
and Freehills (2000) is dismissed with costs.
Associate:
Dated: 13
February 2007
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Solicitor for the First Respondent:
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Counsel for the proposed Cross-Respondents:
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Solicitor for the proposed Cross-Respondents:
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Date of Hearing:
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Date of Judgment:
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URL: http://www.austlii.edu.au/au/cases/cth/FCA/2007/111.html