FEDERAL COURT OF AUSTRALIA Martech International Pty Ltd (ACN 009 022 799) v Energy World Corporation Limited (ACN 009 124 994) [2004] FCA 1470 PRACTICE AND PROCEDURE – cross-claim – involving non-party – requirement that relief be related or connected to the subject of the principal proceedings - discrete dispute – additional parties – closely related to existing parties – purpose of rule – case management considerations – directions to separate discrete aspect of cross-claim to avoid delay and expense in principal proceedings Trade Practices Act 1974 (Cth) Federal Court of Australia Act 1976 (Cth) s 22 Federal Court Rules O 5 MARTECH INTERNATIONAL PTY LTD (ACN 009 022 799) v ENERGY WORLD CORPORATION LIMITED (ACN 009 124 994) W65 OF 2004 FRENCH J 15 NOVEMBER 2004 MELBOURNE (Heard in Perth) IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY W65 OF 2004 BETWEEN: MARTECH INTERNATIONAL PTY LTD (ACN 009 022 799) APPLICANT AND: ENERGY WORLD CORPORATION LIMITED (ACN 009 124 994) RESPONDENT JUDGE: FRENCH J DATE OF ORDER: 15 NOVEMBER 2004 WHERE MADE: MELBOURNE (Heard in Perth) THE COURT ORDERS THAT: On the Respondent's Motion filed 14 September 2004: 1. Subject to the following orders the respondent has leave to bring a cross-claim in terms of the cross-claim filed on 14 September 2004 and to join Australian Energy Equity Pty Ltd (AEE) as a second cross-claimant. 2. So much of the cross-claim filed on 14 September 2004 as relies upon paragraphs 33 to 42 shall be struck out and included in the defence pursuant to Order 5 rule 5(3) subject to amendment to properly disclose a reasonable cause of action. 3. The respondent has leave to amend its defence by including so much of the cross-claim as appears in paragraphs 33 to 42 subject to repleading to properly establish the basis upon which the allegation of misleading or deceptive conduct made in those paragraphs is asserted. 4. The respondent has leave to amend its defence generally. 5. The balance of the cross-claim, filed 14 September 2004, relating to the Vypeen Project, may be amended to give effect to these orders. 6. The amended defence and cross-claim and the amended cross-claim to be filed and served by 29 November 2004. 7. Any amended reply and defence to cross-claim to be filed and served by 15 December 2004. 8. The defence to the Vypeen Project cross-claim to be filed separately from the amended reply and the defence to the cross-claim in the principal proceeding. 9. The parties to give discovery by list in the principal proceedings by 22 January 2005. 10. Separate discovery by list is to be given in the Vypeen Project cross-claim by 22 January 2005. 11. The directions hearing is to be relisted on 1 February 2005 at 9am. 12. The respondent is to pay the applicant's costs thrown away by reason of its amendments to the defence and cross-claim. 13. There is liberty to apply. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY W65 OF 2004 BETWEEN: MARTECH INTERNATIONAL PTY LTD (ACN 009 022 799) APPLICANT AND: ENERGY WORLD CORPORATION LIMITED (ACN 009 124 994) RESPONDENT JUDGE: FRENCH J DATE: 15 NOVEMBER 2004 PLACE: MELBOURNE (Heard in Perth) REASONS FOR JUDGMENT Introduction 1 These proceedings arise out of a dispute between Martech International Pty Ltd (Martech), controlled by Maurice Brand, and Energy World Corporation Limited (Energy). Prior to November 2001, Martech provided Mr Brand's services to Energy as managing director and later as executive director. Their arrangements have been terminated and Martech now sues Energy for unpaid management fees and for damages. Energy and one of its subsidiaries, Australian Energy Equity Pty Ltd (AEE) seek to cross-claim against Martech and Mr Brand. Questions have arisen as to whether the proposed cross-claim which raises, in part, a discrete controversy between them, falls within the Federal Court Rules, whether leave is necessary to bring the cross-claim and, if so, whether such leave should be granted. 2 For the reasons which follow I am of the opinion that the proposed joinder of AEE as a cross-claimant has the effect that leave is required for the cross-claim so far as it involves AEE as a party. I am satisfied that leave can and should be granted in this case but that the cross-claim involving AEE raises a discrete question and should be separately managed until it becomes clear to what extent it can be integrated with the principal proceedings. In so far as the proposed cross-claim involves a cross-claim only by Energy against Martech, which could properly be brought without leave, its pleading is presently deficient. It may be incorporated in the defence pursuant to O 5 r 5(3) of the Federal Court Rules. Factual and Procedural History 3 Martech and Energy entered into a written Agreement on 28 May 1999 under which Martech was engaged to provide to Energy the services of its principal Maurice Brand, as managing director (Service Agreement). The term of the Service Agreement was for four years commencing 1 July 1999. Martech was to receive an annual fee of $500,000 payable monthly in arrears. The fee was to be reviewed on 1 July each year during the term of the Service Agreement and increased by at least the percentage increase in the Consumer Price Index. If the Service Agreement were terminated, other than for reasons set out in various parts of cl 8 of that Agreement, Martech would be entitled to be paid the fee for a further 20 months plus one month for every year that the Service Agreement had operated. So much is not in dispute on the pleadings so far. 4 The fee paid to Martech was varied from $500,000 per annum to $300,000 per annum and paid at the lesser rate from 1 March 2000 to 29 September 2000. The circumstances of that variation are in dispute. Martech claims that the variation was by way of a temporary forbearance on its part on the basis that Energy promised to compensate it for the balance of the fee owing in a manner which would be agreed on between them. Energy says that the reduced fee was paid pursuant to a variation of the Service Agreement made in February 2000. The existence of a variation to the Service Agreement is disputed. 5 In these proceedings, instituted on 25 March 2004, Martech alleges that there was no resolution between it and Energy of the balance of the fee due to it and that Energy breached the Service Agreement by failing, despite demand, to pay the full fee for the period from 1 March 2000 to 29 September 2000. The unpaid fee is said to comprise $19,139 covering the period from 1 March 2000 to 30 June 2000 and $52,524.65 covering the period from 1 July 2000 to 30 September 2000. Energy, in its defence, denies any breach and alleges that the Service Agreement was further varied by an agreement on 7 October 2000. The variation is said to have followed the appointment of Mr Brand as an executive director of Energy from 29 September 2000 and the appointment of Stewart Elliott as managing director of the company in his place. These new appointments meant a change in the nature of the services to be provided by Mr Brand, a further reduction of his fee to $240,000 per annum and a release by Martech of any unpaid fees owing by Energy as at 7 October 2000. Energy also says that 'the respondent', which term is a typographical error and is intended to refer to Martech, would receive a bonus in the event of the final closure of a project known as the West Kimberley Project. Martech was also to participate in an options scheme if and when one was established for employees of Energy. 6 Martech says that the original Service Agreement was terminated by mutual consent on or about 29 September 2000. This was a termination other than for one of the reasons referred to in cl 8 of the Service Agreement which would avoid the payment of a termination fee. On that basis Martech says that it became entitled to the Service Agreement termination payment calculated at the rate of the agreed fee for a period of 21 months, an aggregate sum of $895,125. 7 Martech says that between 30 September 2000 and 19 November 2001, it provided Mr Brand's services as the executive director of Energy. The terms upon which those services were provided were never finally agreed. Nevertheless, it says, it was paid a fee from 1 October 2000 to 31 December 2000 at the rate of $240,000 per annum and from 1 January 2001 to 19 November 2001 at the rate of $163,636.36. Martech says that for that latter period it was entitled to a reasonable fee which it says was $240,000 per annum. This is its 'Quantum Meruit Claim'. 8 In the alternative, and assuming that the original Service Agreement remained on foot to 19 November 2001, Martech says that shortly before 24 October 2001 Mr Elliott told Mr Brand that he would not support his re-election as a director of Energy at the annual general meeting to be held on 30 November 2001. Without Mr Elliott's support Mr Brand could not be re-elected and Martech would be unable to supply his services as an executive director. On that alternative basis it is said Martech became entitled to the termination fee calculated for 22 months, being $989,326.25. 9 Martech alleges that Energy engaged in misleading or deceptive conduct when it represented to Martech, on 3 February 2000, that it would compensate Martech for the reduction in the fee from $500,000 to $300,000. Energy, according to Martech, had no reasonable grounds for making the representation. Martech claims, that on the strength of that representation, it did not terminate the Service Agreement and continued to provide Mr Brand's services at the reduced rate of $300,000 from 1 March 2000 to 30 September 2000. Between 24 September 2000 and 7 October 2000, Energy discussed a proposal to pay $240,000 per annum for Mr Brand's services as executive director, to give him a right to participate in Energy's option scheme and to pay a bonus to Martech if a project known as the West Kimberley Project came to fruition. According to Martech, Energy impliedly represented by its subsequent payment of the new rate and by its silence that it would substantially agree with the terms of the proposal discussed and/or negotiate the proposal in good faith. In so doing it is said that Energy engaged in misleading or deceptive conduct. 10 By amendments to the statement of claim Martech alleges that on 29 October 2001, Energy issued a Prospectus for a non-renounceable rights issue of shares in itself to raise $10 million. According to the Prospectus, its subsidiary, Energy Equity India Petroleum Pty Ltd (Energy India), which held a participating interest in the PY-1 Gas Field in India, had received a withdrawal notice by another party to a joint operating agreement for the gas field. The other joint venture party was entitled to sell Energy India's participating interest without Energy India's consent in those circumstances. This, according to Martech, was not disclosed in the Prospectus. There was, it is said, a breach of provisions of the Corporations Act 2001 (Cth) and the listing rules of the Australian Stock Exchange. For this reason it is said Martech was entitled to terminate the Service Agreement, Mr Brand resigned as a director of Energy and Martech ceased to provide the new services. This allegation is relied upon to support the claim, made in the alternative, for a termination fee of $989,326.25. 11 The original statement of claim was filed on 25 March 2004. A motion to strike it out was filed on 2 July 2004. On 31 August 2004, orders were made giving Martech leave to amend its statement of claim in terms of a proposed amended statement of claim filed on 30 August 2004. The allegations made by Martech which have been outlined above are as set out in the amended statement of claim. The strike out motion was adjourned. In the event the strike out motion did not proceed and on 3 September 2004 directions were given for the filing of a defence and reply and for the filing of any motion for leave to file a cross-claim. A motion for leave to file a cross-claim and to join AEE as a cross-claimant was filed on 14 September 2004. The Proposed Cross-Claim 12 The proposed cross-claim names Energy and its subsidiary, AEE, as cross claimants. It names Martech and Mr Brand as cross-respondents. The factual history upon which the cross-claim relies began more than five years before the events pleaded in the amended statement of claim. Energy and AEE plead an agreement dated 27 August 1993 under which Martech agreed to provide Energy with Mr Brand's services as its managing director. It is said to have been an implied term of the agreement that Martech would exercise reasonable care and diligence in carrying out those services. Mr Brand was also a director of AEE and services provided by Martech included his services as a director of that company. The duties of Mr Brand to exercise care and diligence in the performance of his duties as a director are variously pleaded pursuant to s 232(4) of the Corporations Law, common law and by way of his fiduciary duty. 13 The cross-claim alleges that in or about May 1998, AEE entered into a 'sale and purchase agreement with Prenergy Investments Pty Ltd' (Prenergy). It is said to have been an express term of the agreement that AEE would pay Prenergy a milestone payment of US$2 million '… at that point in time in which all applicable State and Central Government of India approvals for the use of condensate fuel at the proposed Vypeen Power Project in the State of Kerala in India were obtained'. The pleading is somewhat cryptic. Presumably the Sale and Purchase Agreement referred to is an agreement for the sale of condensate fuel. 14 The agreement is said to have been varied in or about December 1998 to reduce the milestone payment to US$1 million. Energy and AEE allege that at all material times approval for the use of condensate fuel at the Vypeen Power Project was required from the Minister of Petroleum and Natural Gas of the Central Government of India and that this was 'an applicable approval' for the purposes of the milestone payment. 15 Then it is alleged that at all material times Martech and Mr Brand knew or ought to have known that the relevant approval was required and that if the milestone payment were approved in circumstances in which ministerial approval for the use of condensate had not been obtained, then AEE and/or Energy was likely to suffer loss or damage. 16 Energy and AEE say that in or about early February 1999 Mr Brand gave approval for the payment of the milestone payment to Prenergy. Mr Brand's approval of the milestone payment is said to have amounted to a representation by Martech that all relevant Indian Government approvals for the use of condensate fuel at the proposed power project had been obtained and that it had exercised due care and diligence in ascertaining that fact. In reliance upon these representations it is said that Energy, on behalf of AEE, paid Prenergy the milestone amount of US$1 million. 17 Energy and AEE claim that approval for the use of condensate had not been obtained from the Minister of Petroleum and Natural Gas of the Central Government of India as at February 1999 and has not subsequently been obtained. Martech and Mr Brand, they say, knew or ought to have known that that was the case. They rely upon the conduct of Martech as conduct in trade or commerce and the conduct of Mr Brand as conduct in trade or commerce between Australia and a country other than Australia, thus attracting the extended application of the Trade Practices Act 1974 (Cth). By reason of these matters it is said that Martech and/or Mr Brand have engaged in misleading or deceptive conduct by reason of which Energy suffered loss and damage. Alternative pleadings based on breach of duties of care owed by Martech and Mr Brand to Energy and AEE are also set up on the same factual basis. 18 The cross-claim then refers, in pars 33 to 42, to the principal proceedings by Martech against Energy and repeats Energy's denial of Martech's claims. In the event that Martech is successful in establishing its claims, Energy says that by memo from Mr Brand to Energy dated 7 October 2000 Martech represented that it would accept a reduction in fees to $240,000 per annum and/or would waive any right to payment of any unpaid fees, that the Service Agreement had not been terminated as at 29 September 2000, and that it would be varied or amended. These are representations said to have constituted misleading or deceptive conduct in trade or commerce for the purposes of s 52 of the Trade Practices Act. Precisely how is not specified. 19 The cross-claim refers, further and in the alternative, to a letter dated 23 February 2001 in which it is said Martech advised Energy that it would accept a reduction in fees to $180,000 per annum and that the clause of the Service Agreement providing for the termination payment would be cancelled. At all material times after 23 February 2001, Martech is said to have invoiced Energy at a rate of $180,000 per annum. It is also said that Martech did not inform Energy that it asserted an entitlement to be paid at that rate. Again it is said that by reason of these matters Martech represented to Energy that it did not assert a right to claim $500,000 per annum in fees and that it would not enforce the clause of the Service Agreement that provided for a termination payment. Its conduct, again in a way not specified, is said to have constituted misleading and deceptive conduct. Whether Leave is Required to File the Cross-Claim 20 On 7 May 2004, the Court ordered that Energy file and serve its defence and any cross-claim on or before 18 June 2004. That order was not complied with, nor was any variation of it sought. Instead, Energy filed a notice of motion to strike out the statement of claim on 2 July 2004. The motion was brought on 31 August 2004 at which time a proposed amended statement of claim had been filed. 21 The failure to comply with the orders of 7 May 2004 or to seek an extension of time for compliance with them was not excused by reason of the filing of a strike out motion. In the event the strike out motion became redundant when leave was given to file the amended statement of claim on 31 August 2004. Further orders made on 3 September 2004, required the filing of a defence by 14 September and the filing of any motion seeking leave to file a cross-claim by the same date. 22 Counsel for Energy now submits that because the time for filing the defence was extended by the Court on 3 September, no leave was required to file the cross-claim. The order extending the time for the filing of the defence and requiring the filing of a motion to seek leave to cross-claim reflected the terms of a minute submitted to the Court on 3 September by Martech's solicitors and not relevantly disputed by counsel for Energy. Counsel for Energy says that he was under a misapprehension as, pursuant to O 5 r 5, a respondent may file a pleading by way of cross-claim within the time fixed for filing his defence or an extension thereof. 23 Order 5 r 1(1) confers the general entitlement upon a respondent to cross-claim against an applicant: 'A respondent may cross-claim against an applicant for any relief to which the respondent would be entitled against the applicant if the applicant were a respondent in a separate proceeding commenced in the Court by the respondent for that purpose.' 24 However, where a respondent wishes to cross-claim against some other party there is a qualification upon its entitlement to do so apparent from O 5r 1(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.' 25 Order 5 r 4 applies rules 5 and 6 to the case in which 'a proceeding is commenced by application supported by statement of claim, or where the Court has ordered that the proceeding continue on pleadings'. Order 5 r 5 provides, inter alia: '(1) A respondent may file a pleading by way of cross-claim within the time fixed for filing his defence or any extension thereof. … (3) Where a cross-claimant cross-claims solely against a party who claims in the proceeding against the cross-claimant, the cross-claimant may add the cross-claim to his defence. … (5) A cross-claimant shall, in addition to pleading any other facts on which he relies, plead the facts showing that the cross-claim is one to which rule 1 of this Order applies.' 26 Order 5 r 8(1) requires the leave of the Court before the respondent may cross-claim against a non-party. The rule however is, by virtue of O 5 r 7, applied only to proceedings commenced by applications supported by affidavit. The same is true of O 5 r 9 which concerns respondents wishing to cross-claim after the directions hearing. 27 I accept for the purposes of these proceedings that Energy would not require leave to bring a cross-claim against Martech or another party out of time pursuant to O 5. The application was commenced by statement of claim and the time fixed for filing the defence was extended by Order. However, the cross-claim involves the joinder of a new party as second cross-claimant, namely AEE. AEE is a subsidiary of Energy but the question whether a cross-claim may be brought naming it as cross-claimant is a matter of discretion and would require leave. In addition, the proposed joinder of Mr Brand as a cross-respondent means that the cross-claim is required to answer the description in O 5 r 1(2) that the relief sought is 'related to or connected with the subject of the proceeding'. 28 The requirement that the relief sought in a cross-claim against a non-party to the principal proceedings, be related to, or connected with, the subject of the proceedings is to be construed in the light of the powers conferred upon the Court by s 22 of the Federal Court Act 1976 (Cth) and the policy underlying that grant 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'. 29 The objective of the requirement that a cross-claim involving a non-party cross-respondent be related to, or connected with, the subject matter of the proceedings is to allow, so far as possible, all aspects of a matter or controversy before the Court to be resolved. The rule does not authorise the joinder in one proceeding of another where the only common factor between them is that the respondent in the first proceeding is the cross-claimant in the second. The words of the rule do not authorise such a cross-claim nor does its policy. The management of cases before the Court would become difficult, if not impossible, if parties could tack on claims against other parties raising different factual and legal issues. The question of what amounts to a sufficient relationship to or connection with the principal proceedings for the purposes of O 5 r 1(2) involves an evaluative judgment of a practical nature having regard to the proper management of the case and the policy of the rule and of s 22 of the Federal Court Act. Where a cross-claim raises a dispute factually discrete and distinct in time from the matter which is the subject of the principal proceedings, and there is a third party involved, the mere existence of the nominal connection between the common parties and even perhaps some degree of factual similarity in the disputes between them, may not be sufficient to characterise the relief claimed in the cross-claim as 'related to or connected with' the subject matter of the principal proceeding. 30 It must be acknowledged of course that the Rules appear to allow for a cross-claim on a discrete and unconnected issue to be raised by a respondent against an applicant where no third party is involved. But even in that case, the Court has a discretion to direct that the cross-claim be tried separately. The exercise of that discretion is a matter of case management informed by essentially practical judgments. 31 So much of the proposed cross-claim in the present case as relates to the Vypeen Project in India involves persons who are formally non-parties in the principal proceedings. They are, however, respectively a subsidiary of the cross-claimant (AEE) and the principal of the cross-respondent (Mr Brand). The cross-claim should not therefore be regarded in quite the same light as one which would introduce strangers into the principal proceedings. There is a relationship between the Vypeen Project claim and the subject of the principal proceedings in that it arises out of an earlier contractual relationship between Energy and Martech whereby Martech provided Mr Brand's services as managing director. It appears otherwise however to be factually and legally unrelated to the primary proceedings as the pleadings presently stand. Assuming it to be proper to treat the Vypeen Project cross-claim as though it were in substance, albeit not in form, a cross-claim by respondent against applicant only, it appears that there may be case management reasons for eventually directing that the trial of that cross-claim be heard separately from the primary proceedings. 32 Energy proposes to amend its defence to particularise Mr Brand's handling of the Vypeen Project as one of the bases for the termination of the Service Agreement with Martech. That is to say, his alleged conduct with respect to that Project in 1999 is proposed to be offered as a particular of his failure in November 2001 to 'carry out his service in a manner satisfactory to Energy'. This, it must be said, is on the face of it a rather unconvincing particular and suggests an attempt to forge a foundation in the defence of the cross-claim joining AEE and Mr Brand. In my opinion however, given the close relationship of the additional parties to the proposed cross-claim, so far as it relates to the Vypeen Project, it should be allowed to proceed on the basis that there is, although just barely, a sufficient relationship or connection with the subject matter of the primary proceedings. 33 There was an issue raised by Martech whether the proposed cross-claim would constitute an abuse of the process of the Court because of the rejection of similar contentions before Master Bredmeyer in other proceedings in the Supreme Court of Western Australia. I do not consider that there is a sufficient factual basis before me to justify a consideration of an abuse claim at this stage. 34 I consider that the cross-claim relating to the Vypeen Project may raise case management difficulties and possibly delay the hearing and determination of the primary proceedings if the two were to proceed in tandem. I propose therefore to stand over to later in the pre-trial process the question whether I should direct a separate trial of that aspect of the cross-claim. I will direct separate discovery to be given in relation to that matter. In the event that, when fully pleaded and after interlocutory processes have been completed, it turns out that both the claim and that aspect of the cross-claim can conveniently be dealt with together there will be nothing to prevent that from occurring. However, in order to keep a manageable separation between the Vypeen Project cross-claim and the second part of the cross-claim which is as between respondent and applicant only and which is not in dispute, I will direct that the second aspect of the cross-claim should be included in the defence. 35 Energy proposes to amend its defence. Its proposed particulars of the basis for termination of the Service Agreement by reference, inter alia, to Mr Brand's handling of the Vypeen Project seem presently less than complete as is its pleading of the misleading and deceptive conduct alleged in the cross-claim from pars 33 to 42. That latter aspect of the pleading is inadequate because it fails to disclose the way in which the alleged representations pleaded in par 34 are said to have been misleading at the time that they were made. The representations as pleaded are promissory and the basis upon which the conduct is said to have been misleading or deceptive is not set out. Mere non-fulfilment of a promise is not misleading or deceptive conduct. Conclusion 36 For the preceding reasons, I will make orders requiring, in effect, the Vypeen Project cross-claim to stand separately from the other cross-claim which is to be incorporated in the defence. There will be consequential orders for amendment of the cross-claim and the defence and for the filing of subsequent pleadings. Separate discovery will be given in respect of the Vypeen Project cross-claim. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French. Associate: Dated: 15 November 2004 Counsel for the Applicant and Proposed First and Second Cross-Respondents: Mr TJ Carmady Solicitor for the Applicant and Proposed First and Second Cross-Respondents: Williams and Hughes Counsel for the Respondent and Proposed First and Second Cross-Claimants: Mr PA Sheiner Solicitor for the Respondent and Proposed First and Second Cross-Claimants: Christensen Vaughan Date of Hearing: 20 October 2004 Date of Judgment: 15 November 2004