- Calix Limited v Grenof Pty Ltd (No 2)  HCA 832 (Parisa Hart)
- Australian Securities and Investments Commission v Wilson (No 3)  FCA 1009 (Denes Blazer)
Whether first respondent should be awarded costs on an indemnity basis – offer of compromise – rule 25.14(2) of the Federal Court Rules – whether applicant’s failure to accept an offer of compromise was unreasonable in the circumstances
Calix Limited v Grenof Pty Ltd (No 2)  FCA 832 (Nicholas J)
The decision in Calix Limited v Grenof Pty Ltd (No 2)(‘Calix’) involved an application by the respondents for an order that the applicant pay its costs on an indemnity basis pursuant to rule 25.14(2) or 25.14(3) of the Federal Court Rules 2011 (Cth) (‘FCR’) or s 43 of the Federal Court of Australia Act 1976 (Cth) (the ‘Act’).
The applicant sought injunctive relief against the respondents for the infringement of claim 1 of the patent in suit. Nicholas J held claim 1 was invalid and the respondents’ process (‘Grenof process’) and products did not infringe (at ). His Honour dismissed the applicant’s application. His Honour had previously made an order that the applicant pay the respondents’ costs of the proceeding including the first respondent’s cross-claim.
On 7 September 2022, before the second respondent was joined to the proceeding, the first respondent served a formal Notice of Offer to Compromise (‘Offer’) to settle the proceeding (at [4). The Offer was accompanied by a ‘without prejudice save as to costs’ letter which stated that the applicant’s claim was likely to fail, and the first respondent’s cross-claim was likely to succeed, for various reasons including that the respondent’s process allows the reaction mixture to boil and does not ‘control the maximum reaction temperature to near the boiling point’ (at ). At the time of the Offer, the proceeding had been on foot for more than a year (at ).
The parties recognised the difficulty that arose in addressing the question ‘whether the applicant’s failure to accept the Offer was unreasonable under r 25.14(2)’ (at ). The Offer was a global offer that proposed to settle both the applicant’s claim and the first respondent’s cross-claim and there are obvious difficulties in applying r 25.14(3) to the respondents’ claim and the applicant’s claim (at ).
The respondents relied on the factors identified by the Full Court in Anchorage Capital Partners Pty Limited v ACPA Pty Ltd (No 2)  FCAFC 112 and submitted (at ):
- the Offer was open for 14 days;
- the compromise was significant;
- the first respondent’s prospects of success, as assessed at the time of the Offer, were strong;
- the Offer was clear; and
- the Offer foreshadowed an application for indemnity costs in the event of the applicant rejecting it.
The respondents submitted that the Offer was made when the evidence on both the claim and cross-claim was substantially complete and the ‘applicant could reasonably assess its prospects of success on the claim and cross-claim and could properly assess the reasonableness of the Offer’ (at ). Further, the respondents submitted the reasons set out by the first respondent in the letter of 7 September 2022, which accompanied the Offer, were broadly consistent with some of the reasons given by the Court in dismissing the application (at ).
The applicant submitted it had not acted unreasonably in rejecting the Offer for the following reasons (at -):
- it not been given a ‘realistic opportunity’ to consider the strength of its position, especially in relation to the issue of infringement;
- the applicant’s continuing investigations were hampered by the first respondent’s conduct including statements in an affidavit made by Mr Redfern which were found to be inaccurate and misleading;
- the difficulties it had in obtaining access to information in respect of which the first respondent claimed confidentiality; and
- at the time it received the Offer it had not been provided with discovery relevant to infringement including documents relevant to the mixing apparatus used and the temperature profiles of the reaction mixture.
His Honour considered the applicant’s complaints about the lack of relevant documentation which would support Mr Redfern’s description of the Grenof process. His Honour formed the view that it was not a matter he regarded as significant on the question of costs (at ). His Honour found that a small number of documents were produced by the first respondent but neither ‘the documents produced nor the inspection led the applicant to accept … the reaction mixture in the Grenof process did in fact boil and … the method used was outside the relevant claim’ (at ). The Court found the applicant ‘never explained why it did not seek an order for an inspection of the Grenof process until it filed an interlocutory application seeking such an order on 23 February 2023’ (at ).
His Honour opined that at the time the Offer was received, it should have been apparent to the applicant and its legal advisers, that the applicant would find it exceedingly difficult to prove the Grenof process did not involve boiling the reaction mixture and it ‘should have led the applicant to give serious consideration to compromising or, if necessary, discontinuing its claim’ (at -). The Offer presented the applicant with an opportunity to extricate itself from litigation which it should have known ‘it was very likely to lose’ (at ).
His Honour was satisfied that the applicant’s rejection of the Offer was unreasonable and ordered the costs payable by the applicant be assessed, with respect to the first respondent on a party and party basis up until 11am on 7 September 2022 and on an indemnity basis thereafter, and with respect to the second respondent on a party and party basis (at ).
The Offer presented the applicant with an opportunity to extricate itself from litigation which it should have known ‘it was very likely to lose’ …
Directors’ duties – s 180(1) of the Corporations Act 2001 (Cth) – arising from the alleged failure by the managing director to do certain things
Standard of proof – where main witness called by each party unsatisfactory – use of objective factual surrounding material, inherent commercial probabilities and documentary evidence – drawing of inferences from available evidence
A company named TPF Corporation Limited (later renamed Quintis Limited) (‘Quintis’) was engaged in the cultivation, sale, distribution, management and ownership of plantations of sandalwood trees and sandalwood oil.
Mr Wilson was a director of Quintis and, at all relevant times, was also its managing director and largest shareholder.
Between about 2011 and 2014, two subsidiaries of Quintis entered into licence and supply agreements (for sandalwood oil) with a global dermatology company owned by Nestle (‘Galderma’) which Galderma ultimately used in a product marketed as an acne solution.
Quintis referred to those supply agreements and the acne solution in numerous ASX releases between 2014 and 2017.
In about December 2016, Galderma indicated an intention to terminate, and then terminated, the supply agreements.
At all relevant times, Quintis did not disclose that termination to the ASX.
From about March 2017, various broker and media reports were published suggesting the supply agreements had been terminated.
Also, in response to an enquiry from ASX in March 2017, Quintis referred to Galderma in its list of ‘customers Quintis has supplied wood or oil to under multi-year contracts’ (‘27 March ASX Response’). Mr Wilson resigned from Quintis that same day.
Eventually, in June 2017, Quintis wrote-off an intangible asset of AUD $7.6 million in its half-year results (as at December 2016) relating to the Galderma agreements (see -).
The allegations and the issues
The Australian Securities and Investments Commission (‘ASIC’) alleged that Mr Wilson contravened his statutory duty of care and diligence as a director and officer of Quintis – pursuant to s 180 of the Corporations Act 2001 (Cth) – in multiple ways:
- first, Mr Wilson failed to tell the board of directors of Quintis (‘Board’) that the Galderma agreements were potentially going to be terminated (at );
- second, Mr Wilson failed to tell the Board about the execution of the Termination Agreement in February 2017 or at all (at );
- third and fourth, in relation to the 27 March ASX Response, Mr Wilson failed to ensure that Quintis did not mislead the market about the termination of the agreements. These alleged failures are said to have exposed Quintis to various adverse consequences, including a risk of breaching the continuous disclosure requirements (s 674) and the prohibition on misleading or deceptive conduct (s 1041H) (at ); and
- fifth, in the alternative, Mr Wilson failed to make enquiries about the status of the Galderma agreements before approving the 27 March ASX Response (thereby exposing Quintis to the same risks as above) (at ).
ASIC sought declarations of contravention, a pecuniary penalty order in respect of all but one of the alleged contraventions, and a banning order (at ).
Mr Wilson denied all of the alleged breaches.
Ultimately, none of ASIC’s alleged breaches of duty of care and diligence were established (at ). As with all such ASIC litigation, the decision is factually complex, and its resolution rests heavily on factual findings made by the Court – holding ASIC strictly to its pleaded case. In summary:
- in relation to the first alleged breach, the Court did not consider the hypothetical reasonable director (occupying Mr Wilson’s position) would have told the Board that Galderma wanted to, and was taking steps to, terminate the Galderma agreements, because ASIC had not established there was anything the Board could have done to prevent that termination or to minimise the harm it would cause to Quintis’s interests;
- in relation to the second, third and fourth alleged breaches, the Court held that ASIC had not discharged its burden of proving that Mr Wilson was given a copy of the termination agreement (and was therefore aware the termination had in fact occurred, as opposed to the possibility of it occurring) before a board meeting in February 2017. Naturally, a hypothetical reasonable director (occupying Mr Wilson’s position) could not be expected to disclose something he did not know; and
- in respect of the fifth alleged, alternative, breach, essentially the Court did not accept that the hypothetical reasonable director (occupying Mr Wilson’s position) would have made enquiries about the status of the Galderma agreements before approving the 27 March ASX Response. The Court considered s/he would have been acting reasonably by proceeding on the basis (in the particular circumstances of this case) that if Galderma had terminated the agreements or told the Quintis subsidiary that it wished to do so, Mr Wilson would have been informed. This rested largely on the narrow way ASIC had pleaded that alternative allegation (see at -).
The decision is also instructive in relation to the following matters.
As with all such ASIC litigation, the decision is factually complex, and its resolution rests heavily on factual findings made by the Court.
The common procedure (for individuals) in civil penalty proceedings
As is common procedure (for individuals) in civil penalty cases:
- the question of what penalties or disqualification orders, if any, should be imposed were separated (by prior order of the Court) from the trial on liability;
- Mr Wilson relied on the privilege against exposure to penalties and was not required to put on a substantive defence, give discovery, or serve any evidence (from himself), until after ASIC had closed its case (at the liability hearing); and
- after ASIC had closed its case (at the liability hearing), Mr Wilson was given an opportunity to elect to go into evidence himself – Mr Wilson did so and filed a substantive defence to ASIC’s claim as well as an affidavit (see  and ).
ASIC’s approach: Likely rather than actual contraventions
Interestingly, ASIC did not allege that Quintis actually breached its continuous disclosure obligations or the prohibition on misleading and deceptive conduct. Rather, it alleged that Mr Wilson’s conduct exposed Quintis to the foreseeable risk of potentially contravening those laws and, because of his conduct, the Board lost the opportunity to decide whether to disclose the terminations (see -;  and ).
Whilst Jackson J decided it was open to ASIC to put its case in that way (see  and ) – and observed that ASIC may have considered that such an approach would make it easier (for ASIC) to establish its case – in the context of s 180 it was still necessary for the Court to determine whether there was a reasonable ‘likelihood’ (as a foreseeable risk) of those contraventions occurring, and therefore the approach did not achieve much of a saving on proof, and was also otherwise ‘liable to make the Court’s task harder’ (see ,  and ).
Burden and standard of proof in civil penalty cases
Because Mr Wilson did not raise any affirmative defence, the burden of proof rested entirely on ASIC (at - and ). Jackson J observed that can become (and here did become) particularly important when the Court decides it is not satisfied as to the case of either of the parties. It may reject both cases. The disbelief of one does not require acceptance of the other – the Court has open to it the third choice of saying that the party with the burden of proving its allegations (here ASIC) has failed to discharge its burden and thereby failed in its case.
Jackson J also reiterated the heightened civil burden of proof which applies in civil penalty cases such that ‘the court will only reach a state of reasonable satisfaction [of a breach of] s 180 if there is clear proof of the kind described in Briginshaw’ (see -). However, such ‘clear proof’ can come in the form of circumstantial evidence and inferences drawn from contemporaneous documents (see -). Greater weight may be given to contemporaneous or near contemporaneous documents than to fallible human memory, especially when the lapse of time between the events in question and the trial is long, and when the witnesses have an interest in the outcome of the litigation (see ).
Lastly, Jackson J held ASIC strictly to its pleaded case, stating: ‘it is necessary of course to address the case, not on the basis of its general tenor, but on the basis of the specific way in which ASIC has pleaded it’ (at ).
Jackson J helpfully summarised relevant principles regarding:
- s 674 of the Corporations Act (see -); and
- s 180 of the Corporations Act – including that the starting point is a precise definition of the powers, responsibilities and duties of the particular director/officer (see -) and:
‘… this involves an objective standard, to be applied by reference to [the relevant company’s] circumstances and the office and actual responsibilities that [the director or officer] held. It is necessary to consider whether there is a foreseeable risk of harm to the company and what, if anything, the hypothetical reasonable director, who is defined as a person who acts with the degree of care and diligence that a reasonable director of a corporation in [the relevant company’s] circumstances would exercise, would have done to remove or reduce that harm. It is necessary to consider the magnitude of the risk, that is the seriousness of the possible harm, and the degree of the probability of its occurrence, along with the expense, difficulty and inconvenience of taking alleviating action and any other conflicting responsibilities which the hypothetical reasonable director may have, including any benefits that might accrue to the company if some different course of action is pursued or no action at all is taken. It is necessary to do this in a forward looking manner, that is, from the point of view of the person at the time the risk arose.
 …The duty of care and diligence cannot be defined without reference to the nature and extent of the foreseeable risk of harm (see Vrisakis at 449) and in my view an officer cannot be said to have failed to act with care and diligence by omitting to perform an act unless it has been established that there was at least a real chance that the act would have reduced or eliminated that harm.’