IN THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY ) GENERAL DIVISION ) No. NG 530 of 1996 BETWEEN: SOFTWARE AG Applicant SOFTWARE AG NORTH AMERICA INC Second Applicant SOFTWARE AG (SINGAPORE) PTE LIMITED Third Applicant AND: COMMONWEALTH OF AUSTRALIA First Respondent AUSTRALIAN SECURITIES COMMISSION Second Respondent ATTORNEY-GENERAL FOR THE COMMONWEALTH OF AUSTRALIA Third Respondent CORAM: Lehane J PLACE: Sydney DATE: 19 December 1996 EXTEMPORE REASONS FOR JUDGMENT LEHANE J: I have before me the respondent's amended notice of motion seeking security for costs. There is no dispute that this is an appropriate case for security to be provided, neither is there any dispute about the form of the security. It is common ground that in this case it is appropriate that security be provided on what has been described as a staged basis. The matter in dispute is the amount of the security to be provided at this stage of the proceedings. The respondent seeks security in the sum of $50,000 on the footing that that is an appropriate sum having regard to costs incurred to date and not taking into account costs likely to be incurred in the course of discovery and inspection. The applicants, on the other hand, have offered to provide security in the sum of $20,000 on the footing that that sum is to cover both costs incurred to date and costs to be incurred in the course of discovery and inspection: that offer has been put to the respondents in the form of an open letter and was repeated by the applicants' counsel in court. The proceedings involve claims by three foreign corporations against the Commonwealth of Australia, the Australian Securities Commission and the Attorney General of the Commonwealth for alleged infringements of copyright and alleged breaches of contract. It is inappropriate and unnecessary to attempt to describe the nature of the proceedings in detail. It is sufficient to say that the applicants have licensed to the Commonwealth or various of its departments, under various contracts, software in which they claim to have copyright. The applicants assert that the respondents have breached the contracts and infringed the copyright by reproducing the software without authority, by permitting it without authority to be used by certain Commonwealth departments and certain instrumentalities whose use it is said is not authorised by the contracts and by providing the software to the Australian Securities Commission by means of what is described in the material as a bureau operated by the Attorney General's Department. It is clear that the parties have a longstanding and very significant commercial relationship. It is clear also that the proceedings involve some significant issues of law and, should it become necessary to investigate them fully, some complex issues of fact. With that background I can return to the motion. A brief history of the way in which the proceedings were commenced may be summed up as follows. Following inconclusive discussions between the parties, the applicants on 28 July 1995 sent to the second respondent, the Australian Securities Commission (ASC), a letter of demand. It was in reasonably unambiguous terms. It required either payment of substantial license fees or a binding undertaking that the ASC would cease to use certain software immediately and threatened that if neither of those two courses was taken the applicants would approach the court for an injunction to restrain breach of copyright and seeking damages. That letter by no means led to immediate proceedings. It led instead to further discussions between the parties which failed ultimately to produce a resolution. In the end, in June this year an application and statement of claim were filed. Apparently they were not served until September this year. In those circumstances the respondents say that $50,000 is an appropriate sum to be provided by way of security, as representing not merely work done from the date of the service of the application but also work done between the date of the letter of demand to which I have referred and the date of service of the application. The applicants on the other hand say that the work done before the application was served ought not to be regarded as resulting in costs of the respondents of and incidental to the proceeding, but rather costs incurred in the course of attempting to settle a commercial dispute, having no necessary relationship to these proceedings. Indeed, apart from relatively minor differences as to amounts appropriate for various items of work done since the date on which the application was served, it is evident that the principal area of dispute between the parties is whether there should be any, or at least any substantial, allowance for work done in the period after the letter of demand was sent but before the application and statement of claim were served. In that respect the claim of the respondents is supported by evidence of an experienced legal costs consultant, Kim Musgrave Chapman, who gave evidence by affidavit that a sum of $31,000 to $34,000 was likely to be recovered from the applicants on a party and party basis, assuming their success in the proceedings, referable to work done during that intervening period. On the other hand evidence given by Mr Burt, the solicitor in the firm acting for the applicants having conduct in the matter for the applicants, is to the effect that in his experience no allowance would be made on taxation for that work or at least no substantial allowance. In a sense a question of this sort is one that is very difficult to resolve unless one is in a position of a taxing officer with all the relevant material before one. Indeed it was suggested during the course of argument yesterday that it might be appropriate to take a course which in some cases has been taken: that is, the course of referring the matter to a deputy registrar for an assessment as to whether any of the work done in the period to which I have referred would be allowed to the respondents on taxation. It seems to me, given at this stage the relatively small amounts in issue and given that this is a question which is highly unlikely to recur in these proceedings, that it is both unnecessary and inappropriate to take that course. I think I have sufficient material before me to enable me to make an assessment adequate for a proper exercise of discretion. Looking at the matter in that way, what I have before me principally is evidence of a qualified legal costs consultant who has had access to the respondents material and whose evidence is directly to the effect that the amount which I have stated is likely to be recoverable on a party and party basis. It is true that the evidence is not particularly detailed. It describes in a rather general way the work to which it refers and it does not refer in any detail to time spent on particular items of work. It is nevertheless an estimate made following an examination of the relevant material and made explicitly on the relevant basis. During the course of argument yesterday, I expressed some scepticism as to whether the amount which Mr Chapman says is appropriate in relation to the work done before service of the application is really likely to be wholly justified by reference to what was necessary for the proceedings, as opposed to what might have been incurred in the course of seeking a commercial resolution. I cannot suppress a degree of continuing scepticism; but there is, in my view, force in the response put to me by counsel for the respondents that this is evidence from a qualified consultant addressing the relevant question and having regard to relevant material and certainly, to put it at its lowest, it is impossible for me to say that the work to which reference has been made could not be work productive of costs of the respondents of and incidental to the proceedings or, in the more general terms of section 56 of the Federal Court of Australia Act, costs that may be awarded against the applicants. I think on that footing I should substantially accept what has been put to me by the respondents on that aspect of the matter. The second issue of substance was whether the security to be provided at this stage ought to encompass discovery and inspection and if so how much ought to be allowed for that. A reading of the evidence relied on by the respondents suggests or might suggest that some allowance was sought at this stage for work involved in discovery and inspection. Counsel for the respondents, however, made it perfectly clear that all that was sought at this point was security for costs of work actually done to date: excluding, that is to say, work to be done on discovery and inspection in the future. I shall proceed on that basis, disregarding therefore evidence as to costs likely to be incurred in the course of discovery and inspection. Indeed, given the uncertainty, at this stage in the proceedings, as to the precise scope of discovery it would in my view be quite inappropriate to proceed on any other basis. On that footing the evidence read on behalf of the respondents is to the effect that the amounts likely to be recovered on a party and party basis are between $31,000 and $34,000 for work done during the period before service of the application, $9000 to $11,000 for work done since and up to the date of Mr Chapman's affidavit which was 14 November 1996. To that, on the respondents' view of the case, one would add counsel's fees estimated to have been incurred ($5000) and perhaps some allowance for work done by the solicitors for the respondents since the date of Mr Chapman's affidavit. It is by adding those sums together that the respondents reached the suggested conclusion that $50,000 is the appropriate sum. It is now I think well established that security for costs is not intended necessarily to provide a complete indemnity to a respondent in respect of costs which it may ultimately be entitled to recover against an applicant. Nor, on the other hand, is it appropriate as a general rule to discount an estimate of party and party costs by some arbitrary amount, for example one third. The principles now applied are helpfully summarised in the judgment of Lindgren J in Allstate Life Insurance Company and Ors v Australia and New Zealand Banking Group Limited No. 19 (1995) 134 ALR 187. His Honour refers to early authority in this court and concludes that frequently it is appropriate to make some reduction in assessing the proper amount of security in the amount estimated as party and party costs incurred or likely to be incurred by reference to a number of factors, one of which is what is in common experience the likelihood that there will be some reduction on taxation of the amount estimated. I think I may give appropriate recognition to the evidence of Mr Burt, and to my own scepticism in the absence of detailed supporting information, by discounting somewhat the amount estimated by Mr Chapman as likely to be recoverable on a party and party basis for the period preceding service of the application. Taking account of those matters, but having regard also to my substantial acceptance of the evidence and submissions on behalf of the respondents, in my view the appropriate course is to order that the amount of security to be provided by the applicants is $40,000. That is to be taken not to include any allowance for discovery or inspection. Accordingly the orders that I propose to make are orders 1 and 2 as set out in the amended notice of motion, but substituting for the sum of $50,000 the sum of $40,000. The applicants submit that costs should be reserved. I think there is no particularly good reason, however, to do so. The respondents have achieved substantial success on their motion. I think it is appropriate to order that the applicants pay the respondents' cost of the motion. I certify that this and the preceding 7 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lehane. Associate: Dated: 18 December 1996 Heard: 18 December 1996 Place: Sydney Decision: 18 December 1996 Appearances:Ms J R Baird of counsel instructed by Middletons Moore & Bevins appeared for the applicant. Mr D M Yates of counsel instructed by the Australian Government Solicitor appeared for the respondent.