The Federal Court weighs in on the “genuine steps” requirement under the Civil Dispute Resolution Act 2011 (Cth)

The case of Superior IP International Pty Ltd v Ahearn Fox Patent and Trade Mark Attorneys [2012] FCA 282 (Superior IP) offers substantial insight into how the Courts will apply the “genuine steps” requirement under the Civil Dispute Resolution Act 2011 (Cth) (the CDR Act) in respect of applications made in the Federal Court to set aside statutory demands.

It illustrates that parties must comply with the CDR Act when seeking to set aside a statutory demand in the Federal Court; otherwise, parties (and their lawyers) risk facing an adverse costs order.

The law

  • A company served with a statutory demand has 21 days from the date it is served to either comply with the demand, agree to a payment arrangement or file and serve an application under section 459G of the Corporations Act 2001 for an order that the statutory demand be set aside.
  • The CDR act imposes obligations on federal civil litigants and their lawyers to engage in “pre-action” negotiation for the resolution of disputes and then file a “genuine steps statement” at the time of commencing proceedings (specifying the actions the applicant has taken to resolve the dispute).  The respondent must also file a response to the genuine steps statement.

The facts

This decision concerns an application to set aside a statutory demand under section 459H of the Corporations Act 2001 (Cth).

The Respondent is a firm of patent and trade mark attorneys that was engaged by the Applicant to prosecute an application for a patent for “an improved connector for timber” in a number of countries.  The Respondent issued a number of invoices to the Applicant for the services it says it provided under its engagement with the Applicant.  A dispute arose as to the amounts claimed in nine unpaid invoices totalling $10,706.33 and the Respondent served the Applicant with a statutory demand in respect of this unpaid amount.  The Applicant filed an application in the Federal Court seeking an order that the statutory demand be set aside.

No attempt had been made to resolve the dispute before the Applicant filed its application and no “genuine steps statement” had been filed.

The decision

The Court found that a genuine dispute existed in respect of 6 of the nine invoices. The other 3 invoices totalled $1,057.03. As this amount is less than the statutory minimum under s459E, the Court set aside the Respondent’s statutory demand.

Regarding the issue of costs, Justice Reeves held that both the Applicant and the Respondent had behaved in a manner which was the “absolute antithesis” of the overarching purpose of civil practice and procedure. Not only had no attempt been made to resolve the dispute prior to the hearing, but when questioned as to the fees incurred so far by the parties, the total of the fees was almost twice the amount of the statutory demand in question.

Consequently, the parties were directed to seek independent legal advice on the question of costs in the proceeding, and the lawyers concerned were joined as parties to the proceeding for the purpose of determining the issue of costs.

Furthermore, Justice Reeves referred the lawyers involved to the Queensland Law Society, the Bar Association of Queensland and the Legal Services Commission.

Implications

This case serves as a reminder to federal litigants to ensure that they comply with the CDR Act by taking genuine steps to try to resolve their dispute before they apply to the Federal Court for an order to set aside a statutory demand.

A party seeking to set aside a statutory demand will want to consider the following matters:

  • If the application is to be made in the Federal Court, then the obligations to file a genuine steps statement in accordance with the CDR Act applies to the parties involved and their lawyers.
  • As an application to set aside a statutory demand must be filed and served within 21 days after the demand is served on the company, any efforts to resolve the dispute will also need to occur well within that 21 day time period.
  • There is no prescription in the CDR Act as to what steps constitute “genuine steps” to try and resolve the dispute.  However, if time permits, it may be advisable that a letter is sent to the other party setting out in detail the basis on which the Applicant says the statutory demand should be withdrawn.
  • The CDR Act only applies to Federal Court proceedings. Parties way wish to reconsider the court within which they bring their application to set aside a statutory demand. Given the tight timeframe within which parties must apply to the court to have a demand set aside, there may be a greater tendency for parties to make their application in a state court as opposed to the Federal Court.