CATCHWORDS PRACTICE AND PROCEDURE - pleadings - application to strike out cross-claim - cross-claim seeks declaration that insurer of defendant is liable to indemnify its insured - jurisdiction of the Court to grant the declaration sought - whether reasonably arguable that Court would exercise its discretion in favour of making declaration - whether declaration shown in circumstances to have utility. PRACTICE AND PROCEDURE - pleadings - application to strike out cross-claim - no argument that cross-claim not reasonably arguable - assuming power to strike out cross-claim which has reasonable prospects of success it should be used only in exceptional circumstances. Federal Court of Australia Act 1976 (Cth) ss 19(1), 21 and 22 Bankruptcy Act 1966 (Cth) s 117(1) Federal Court Rules O 5 Australia and New Zealand Banking Group Limited v Turnbull & Partners Limited & Ors (1991) 33 FCR 265 J N Taylor Holding Limited (In liquidation) and J N Taylor Finance Pty Ltd (In liquidation) v Allan Bond and Ors (1993) 59 SASR 432 Moorgate Tobacco Company Ltd v Philip Morris Ltd & Anor (1980) 145 CLR 457 Phillip Morris Incorporated & Anor v Adam P. Brown Male Fashions Pty Ltd (1981) 148 CLR 457 Fencott & Ors v Muller & Anor (1983) 152 CLR 570 Gerah Imports Pty Ltd v The Duke Group (In Liquidation) (1993) 61 SASR 557 Ainsworth and Another v Criminal Justice Commission (1992) 175 CLR 564 No. SG29 of 1995 No. SG30 of 1995 BETWEEN: ROBERT ABROOK & ORS First Applicants WILLIAM JOHN EAST as administrator of the Family Security Friendly Society Second Applicant GREGORY PATERSON & ORS (SG29 of 1995) First Cross Respondents (SG30 of 1995) First to Seventh Respondents/Cross Claimants THE CHASE MANHATTAN BANK AUSTRALIA LIMITED (SG29 of 1995) First Respondent/Cross Claimant (SG30 of 1995) Cross Respondent THE CHASE MANHATTAN BANK AUSTRALIA LIMITED Cross Claimant BRUCE EDWARD FORDMAN & ORS Cross Respondents THE CHASE MANHATTAN BANK AUSTRALIA LIMITED Cross Claimant ALEC SHARPE Cross Respondent Branson J Adelaide 15 November 1995 IN THE FEDERAL COURT OF AUSTRALIA) SOUTH AUSTRALIA DISTRICT REGISTRY) No SG29 of 1995 GENERAL DIVISION ) No SG30 of 1995 BETWEEN: ROBERT ABROOK & ORS First Applicants WILLIAM JOHN EAST as administrator of the Family Security Friendly Society Second Applicant GREGORY PATERSON & ORS (SG29 of 1995) First Cross Respondents (SG30 of 1995) First to Seventh Respondents/Cross Claimants THE CHASE MANHATTAN BANK AUSTRALIA LIMITED (SG29 of 1995) First Respondent/Cross Claimant (SG30 of 1995) Cross Respondent THE CHASE MANHATTAN BANK AUSTRALIA LIMITED Cross Claimant BRUCE EDWARD FORDMAN & ORS Cross Respondents THE CHASE MANHATTAN BANK AUSTRALIA LIMITED Cross Claimant ALEC SHARPE Cross Respondent REASONS FOR DECISION CORAM: Branson J PLACE: Adelaide DATE: 15 November 1995 These two actions, which are presently being heard together by O'Loughlin J, have a complicated history. It is not necessary for me to set it out in full. The actions arise out of the financial failure of the Family Security Friendly Society, a registered friendly society under the Friendly Societies Act 1913 (Qld). Claims are made by individuals who were at relevant times members of the society, and by the administrator of the society, against the society's bank and its auditors and against certain professional advisers. A number of cross-claims has been filed and served. His Honour referred for hearing before me two notices of motion filed in the proceedings. Each of them relates to a cross-claim filed and served on behalf of Chase Manhattan Bank Australia Limited ("Chase"). By the first, the cross respondent Alec Sharpe, the nominal defendant for the professional indemnity insurers of the first to seventh respondents, moves the Court for orders:- "1. That the hearing of the Cross Claim against Alec Sharpe be heard separately from the proceedings between the other applicants, respondents, cross claimants and cross respondents. 2. That the hearing of the Cross Claim and all interlocutory applications connected therewith take place in Sydney. 3. That the Cross Claim be dismissed. 4. Directions generally. 5. Costs." By the second notice of motion, as amended during the course of argument before me, certain cross respondents being some of a large number of individual chartered accountants who during the years 1989 and 1990 practiced in States of Australia other than Queensland under the trading name "Horwath & Horwath", move the Court for orders:- "1 That the Cross-Claim of The Chase Manhattan Bank dated 12 September 1995 be dismissed. 2 Alternatively, that the Cross-Claimant Chase Manhattan Bank and the said Respondents to the said Cross-Claim shall not be bound as between themselves by a judgment (including a judgment by consent or default) or decision (including a decision by Consent) on the claim on the originating processes herein or any other Cross-Claim or claim in the within proceedings. 2A An order that the Cross-Claim of The Chase Manhattan Bank against the Cross Respondents Fordman & Ors dated 12 September 1995 be tried separately from the trial and determination of the proceedings between the applicants and respondents in Horwath & Horwath and The Chase Manhattan Bank actions (as defined in the order of O'Loughlin J made in the within actions on 23/5/95). 3 Such further or other orders as the Court may deem fit. 4 Costs." On the day of the hearing before me a further notice of motion was filed on behalf of the remainder of the cross respondents named in the cross-claim of Chase dated 12 September 1995. Such notice of motion, as amended during argument, seeks identical orders to those sought by the second notice of motion. By consent these two notices of motion were heard together. The applicants pursuant to these two notices of motion will together be described as "the interstate partners of Howarth & Horwath". I turn to the notice of motion filed on behalf of Alec Sharpe. Argument has only been heard on whether an order should be made as sought by paragraph 3 of the notice of motion. It is convenient to set out the cross-claim filed against Alec Sharpe in full. It reads as follows:- "1 The Applicants in Robert Abrook & ors v Chase Manhattan Bank Australia Ltd & anor (SG29 of 1995) have commenced proceedings against the Cross-Claimant ("Chase") seeking, inter alia: (a) damages for conversion of certain cheques, negligence, breach of contract, loss of use of money; (b) equitable compensation for breach of fiduciary duty; (c) an account and order for moneys had and received. 2 In Robert Abrook & Ors v Gregory Paterson & Ors (t/as Horwath & Horwath) (SG30 of 1995), the First to Seventh Respondents, Gregory Paterson & Ors ("the Horwath & Horwath Queensland Partners") have cross-claimed against Chase seeking: (a) contribution for conversion, moneys had and received and negligence; (b) compensation for breach of duty of care owed to the Horwath & Horwath Queensland Partners; and (c) damages for breach of statutory duty and contravention of section 52 of the Trade Practices Act 1974 and section 38 of the Fair Trading Act (SA or QLD). 3 Chase has sued the Horwath & Horwath Queensland Partners by way of cross claim for indemnity or contribution in respect of the liability, if any, of Chase as Respondent in Proceedings No. 29 of 1995 and as Cross Respondent in Proceedings No. 30 of 1995. The Cross Claimant craves leave to refer to its cross claim against the Horwath & Horwath Queensland Partners ("the Cross Claim") a copy of which is delivered herewith. 4 The Horwath & Horwath Queensland Partners were at all material times insured with insurers represented by the Cross Respondent ("the Represented Insurers") in respect of, inter alia, the liability of the Horwath & Horwath Queensland Partners to Chase on the Cross Claim. Particulars to paragraph 4 The Represented Insurers were the insurers of the Horwath & Horwath Queensland Partners in respect of the period 1 May 1992 to 30 April 1993. The Horwath & Horwath Queensland Partners gave notification to Marsh & McClennan, Melbourne, by facsimile dated 16 April 1993. The Cross Claimant will provide further and better particulars after discovery. 5 The Cross Respondent has been nominated by the Represented Insurers as their representative for the purposes of this Cross Claim. 6 The said policy on its proper construction and in the events which have happened give to Horwath & Horwath Queensland Partners an indemnity in respect of their liability, if any, to Chase on the Cross Claim. 7 In the premises, the Cross Claimant Chase claims: (a) a Declaration that the said policy validly indemnifies the Horwath & Horwath Queensland Partners in respect of their liability (if any) to the Cross Claimant on the Cross Claim; (b) costs." It is argued on behalf of Alec Sharpe that the above cross-claim amounts to an attempt by a stranger to a private contract to seek to obtain a statement from the Court as to the effect of that contract in circumstances in which the parties to the contract seek no such thing. Mr Foster S.C., who appeared for Alec Sharpe, submitted that either as a matter of jurisdiction, or as a matter of the proper application of judicial discretion, in the circumstances of this case the cross-claim ought not to be permitted to stand. The first question which arises is that of the jurisdiction of the Court. Section 19(1) of the Federal Court Act provides that the Court "... has such original jurisdiction as is vested in it by laws made by the Parliament." The reference to "the Parliament" is, of course, a reference to the Federal Parliament. The jurisdiction conferred on the Court by s19 includes a jurisdiction to determine the whole of the matter in controversy between the parties. This includes those parts of the matter which arise at common law provided that they arise out of the same controversy (Moorgate Tobacco Company Ltd v Philip Morris Ltd & Anor (1980) 145 CLR 457; Phillip Morris Incorporated & Anor v Adam P. Brown Male Fashions Pty Ltd (1981) 148 CLR 457; Fencott & Ors v Muller & Anor (1983) 152 CLR 570). It is not suggested that this Court lacks jurisdiction in respect of the cross-claim on the basis that it raises a non-federal claim which is not within the scope of the controversies being litigated before O'Loughlin J. Rather, what is argued is that the particular relief claimed by the cross-claim is, in the circumstances of this case, not such as to invoke the jurisdiction of the Court. Section 22 of the Federal Court of Australia Act 1976 (Cth) ("the Federal Court Act") is in the following terms:- "The Court shall in every matter before the Court, grant, either absolutely or on such terms and conditions as the Court thinks just, all remedies to which any of the parties appears to be entitled in respect of a legal or equitable claim properly brought forward by him in the matter, so that, as far as possible, all matters in controversy between the parties may be completely and finally determined and all multiplicity of proceedings concerning any of those matters avoided." Order 5 of the Federal Court Rules is designed to facilitate the achievement of the above statutory requirement. It does not itself confer substantive rights (Australia and New Zealand Banking Group Limited v Turnbull & Partners Limited & Ors (1991) 33 FCR 265 per Sheppard J at 276). The cross-claim against Alec Sharpe was filed and served in reliance upon O5 r1(2) which is in the following terms:- "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 proceedings." As to the precise form of relief sought by the cross-claim, section 21 of the Federal Court Act provides as follows:- "(1)The Court may, in relation to a matter in which it has original jurisdiction, make binding declarations of right, whether or not any consequential relief is or could be claimed. (2)A suit is not open to objection on the ground that a declaratory order only is sought." It is accepted that these proceedings are proceedings in which this Court has original jurisdiction. In my view, s21 of the Federal Court Act sets at rest any argument that in such proceedings the Court may lack jurisdiction to make a bare declaratory order. The Full Court of the Supreme Court of South Australia in J N Taylor Holdings Limited (In liquidation) and J N Taylor Finance Pty Ltd (In liquidation) v Allan Bond and Ors (1993) 59 SASR 432 ("the J N Taylor case") took the same view of the effect of s31 of the Supreme Court Act 1935 (SA) which is in similar, but not identical terms, to s21 of the Federal Court Act. King CJ, with whom Prior and Perry JJ agreed, said at 436:- "I can find no warrant for the imposition by the courts of a self-denying restriction on their jurisdiction to grant declaratory relief. In my opinion there is no jurisdictional limit. The court's power to grant relief is "only limited by its own discretion" ... and the boundaries of judicial power ... The settled practice of the courts may indicate the manner in which the discretion will be exercised in given circumstances." Does the proper application of judicial discretion nonetheless indicate that this cross-claim ought not to be allowed to stand? As King CJ pointed out in the J N Taylor case at 436:- "... there are circumstances which are so contra-indicative to the exercise of the discretion in favour of the grant of declaratory relief that the existence of those circumstances would lead almost inevitably to the exercise of the discretion against the making of a declaration." It is contended on behalf of Alec Sharpe that the circumstances of this case are such that it can not reasonably be argued that the Court would exercise its discretion in favour of the making of the declaration sought by the cross-claim. As Mr Foster recognised, the main obstacle in the way of the above submission is the decision of the Full Court of the Supreme Court of South Australia in the J N Taylor case. He did not concede that the J N Taylor case was rightly decided. However, recognising the difficulties in the way of a bare submission to this Court that the case was wrongly decided in circumstances in which he must establish that the cross-claim has no arguable prospects of success, he sought to distinguish the circumstances which gave rise to the J N Taylor decision from the circumstances of this case on a number of bases. The first basis was that the application in that case was made by the plaintiff for the joinder of a co-defendant, rather than as here, an application by a cross respondent for the dismissal of a cross-claim filed and served pursuant to the Federal Court Rules. The second basis was that the only respondent within the jurisdiction in the J N Taylor case was bankrupt, which is not the case here. The third basis was that in the J N Taylor case a factor taken into account by the Full Court was an asserted assignment of the benefit of the insurance policy to the plaintiffs. Finally it was contended that in the circumstances of this case, as opposed to the circumstances of the J N Taylor case, no issue estoppel or res judicata would arise as between Alec Sharpe, representing the insurer, and the Queensland partners of Horwath & Horwath, the insured, with the result that any declaration made would lack utility. As to the first of the asserted bases of distinction, I do not consider that the formal identity of the party claiming the declaration, or of the party against whom the declaration is sought, is a significant point of distinction between the J N Taylor case and this case. Section 22 of the Federal Court Act requires the Court to grant "... all remedies to which any of the parties appears to be entitled ...". Plaintiffs are in no special position in this regard. The second asserted basis of distinction is dealt with below. As to the third, it seems to me to involve the placing of too much weight on a factor described by King CJ, with whom the other members of the Full Court agreed, as a minor factor. As to the contention that any declaration would lack utility, the terms of O5 r12 of the Federal Court Rules are, I consider, important in this regard. In particular, the power of the Court to determine pursuant to O5 r12(2)(f) "... the extent to which the cross-claimant and a respondent to the cross-claim shall be bound as between themselves by a judgment ... on the claim on the originating process or any other cross-claim in the proceeding ..." provides, in my view, an answer to the submission of non-utility. No argument was put which questioned the validity of O5 r12(2)(f) of the Federal Court Rules. Mr Foster characterised the reliance by the cross claimant on O5 r12 as an attempt by the cross claimant to lift itself by its "bootstraps". Whatever may be said as to the aptness of this characterisation, it was, it seems to me, a characterisation equally open in the J N Taylor case. In that case an application was made by the plaintiff to join the insurer of the defendants as a co-defendant. The purpose of the proposed joinder was to enable a claim to be made against the insurer for a declaration that it was obliged to indemnify the defendants should a judgment be obtained against them. The Full Court allowed the joinder on the basis that such a declaration would have utility because, as a co-defendant in the proceedings with its insured, the insurer would be bound by any declaration of liability made in the proceedings against its insured. The Full Court did not consider it necessary to consider whether, viewed independently from the consequences of joinder, the plaintiff could show utility in the declaration which it sought against the insurer. This case is a slightly less strong one than the J N Taylor case: the insurer will not automatically be bound by any declaration of liability made against its insured. However, the Court has the power to determine that it is to be so bound. In my view it would be inappropriate to dismiss the cross-claim on the basis of want of utility before the Court has had an opportunity to consider the extent to which determinations pursuant to O5 r12 of the Federal Court Rules ought to be made. The significance of the insurer being bound by any declaration of liability in the J N Taylor case arose from the terms of s117 of the Bankruptcy Act 1966 (Cth) ("the Bankruptcy Act"). The only defendant within the jurisdiction in that case was at the time bankrupt. Section 117(1) of the Bankruptcy Act provides as follows:- "Where: (a) a bankrupt is or was insured under a contract of insurance against liabilities to third parties; and (b) a liability against which he is or was so insured has been incurred (whether before or after he became a bankrupt), the right of the bankrupt to indemnity under the policy vests in the trustee and any amount received by the trustee from the insurer under the policy in respect of the liability shall, if the liability has not already been satisfied, be paid in full forthwith to the third party to whom it has been insured." Section 117 of the Bankruptcy Act is also said by Chase to give significance to this cross-claim. There is no suggestion that the respondents in action number SG30 of 1995 ("the Horwath & Horwath Queensland Partners") or any of them, are or is bankrupt. However, the total amount of the claims of the applicants in the two proceedings before the Court is approximately $23M. In my view the Court is entitled in these proceedings to make the same "reasonable, common sense deduction" as was made in Gerah Imports Pty Ltd v The Duke Group (In Liquidation) (1993) 61 SASR 557 at 564, namely that a relatively small group of individuals is unlikely to be able to meet a judgment in the order of many millions of dollars. In Ainsworth and Another v Criminal Justice Commission (1992) 175 CLR 564 Mason CJ, Dawson, Toohey and Gaudron JJ pointed out at 581-582:- "It is now accepted that superior courts have inherent power to grant declaratory relief. It is a discretionary power which "[i]t is neither possible nor desirable to fetter ... by laying down rules as to the manner of its exercise." However, it is confined by the considerations which mark out the boundaries of judicial power. Hence, declaratory relief must be directed to the determination of legal controversies and not to answering abstract or hypothetical questions. The person seeking relief must have "a real interest" and relief will not be granted if the question "is purely hypothetical", if relief is, "claimed in relation to circumstances that [have] not occurred and might never happen" or if "the Court's declaration will produce no foreseeable consequences for the parties"." Do the "considerations which mark out the boundaries of judicial power" referred to in the above passage suggest that this cross-claim should be summarily dismissed? Once the circumstances of this case are viewed in the light of the decision in the J N Taylor case, it seems to me to be difficult to say that it cannot reasonably be argued that there is a legal controversy to be determined by the declaration sought on the cross-claim. By the same token, it seems to me to be difficult to say that it cannot reasonably be argued that the cross claimant has a "real interest" in raising the controversy, and that the question is not "purely hypothetical". However, has relief been claimed in circumstances which "might never happen"? There is little certainty in the business world and I do not understand this test to require absolute certainty. In the J N Taylor case the defendants who were outside of the jurisdiction might in theory have returned to Australia at any time, and they might then have had sufficient funds to meet a judgment against them. Indeed, judgment might never be entered against the defendants in that case. The "reasonable common sense deduction" referred to above is, in my view, arguably sufficient in the circumstances to satisfy the requirements of this test. In my view it cannot be said at this stage of these proceedings that the cross-claim against Alec Sharpe is not reasonably arguable. I decline to strike it out. I turn to consider the notices of motion which seek orders striking out the cross-claims filed by Chase against the interstate partners of Horwath & Horwath. It is not contended on behalf of the interstate partners of Horwath & Horwath that such cross-claims are not reasonably arguable. Rather it is argued that fairness demands that the issues raised by the cross-claims be heard separately and after a determination of the original proceedings and other cross-claims now before the Court. It is suggested that this can be achieved either by dismissing the cross-claims pursuant to O5 r12(2)(e) of the Federal Court Rules, thus requiring Chase to institute separate proceedings against the interstate partners of Horwath & Horwath, or by the making of an order pursuant to O5 r12(2)(b) that the issues arising on the cross-claim be tried after the determination of the actions now before the Court. Order 5 r12 of the Federal Court Rules is apparently intended to ensure the orderly and fair determination of complex proceedings before the Court (see also O6 r6 which is concerned with joinder). Assuming, without deciding, that the Court has power pursuant to O5 r12(2)(e) of the Federal Court Rules to strike out a cross-claim properly filed and served which has reasonable prospects of success, the terms of s22 of the Federal Court Act are such, in my view, that the exercise of such a power could only in exceptional circumstances be justified. The power of the Court under O5 r12(2)(b) to order that "... any claim, question or issue in or arising on the cross-claim be tried in such manner as the Court may direct ...", when read with the wide powers of the Court to give directions concerning both originating process and cross-claims, will in nearly every case be sufficient to ensure an orderly and fair determination of the issues raised in any cross-claim. It has not, in my view, been shown that they cannot be sufficient here. I do not consider it to be appropriate at this stage of the proceedings to strike out the cross-claim filed by Chase against the interstate partners of Horwath & Horwath. As is mentioned above, the actions in which the cross-claims before me were filed and served are presently part-heard before O'Loughlin J. He has made complex orders as part of the case management of the actions. Such orders are, in part, designed to alleviate difficulties which would otherwise be experienced by parties who have been brought into these complex proceedings at a late stage. Not having had the conduct of the proceedings, I am not familiar with the course which the hearing has taken to date. Nor am I in a position to make judgments about the extent to which the calling of evidence on issues raised by the cross-claims before me may be deferred. The theoretical desirability of the cross respondents to the cross-claims before me being bound by his Honour's determinations on the issues of liability between the applicants and the respondents on claims in the originating proceedings is obvious. However, I am not in a position to balance against this theoretical desirability the potential for unfairness or prejudice to the cross respondents by reason of their having been brought into the proceedings at a late stage. In my view, only O'Loughlin J, as the trial judge, can deal with these questions. Each of the notices of motion before me will be referred to his Honour for further consideration except to the extent that each of them seeks an order for the dismissal of the cross-claim with which it is concerned. To that extent each of them is dismissed. I will hear counsel on the question of the costs of the argument before me on the notices of motion. I certify that this and the preceding pages are a true copy of the Reasons for Decision of the Honourable Justice Branson. Associate: Dated: Counsel for the Cross Claimant : Mr B McClintock Solicitors for the Cross Claimant: Mallesons Stephen Jaques Counsel for the Cross Respondent Alec Sharpe : Mr L Foster SC Solicitors for the Cross Respondent Alec Sharpe : Phillips Fox Counsel for the Cross Respondents Bruce Edward Fordman & Ors : Mr J Sulan QC with him Mr D White; Mr D Johnson Solicitors for the Cross Respondents Bruce Edward Fordman & Ors : Playfords; John J Oswald-Jacobs & Co, and Anthony Kelly & Associates Hearing Date : 26 October 1995