FEDERAL COURT OF AUSTRALIA

Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd (No 2) [2011] FCAFC 141

THE COURT ORDERS THAT:

1.    There be judgment for the appellant against the respondent for $3,527,110.26 plus interest at the rate prescribed in Rule 39.06 of the Federal Court Rules 2011 for the purpose of s 52 of the Federal Court of Australia Act 1979 (Cth) from and including 16 February 2011 to the date of payment.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    On 9 September 2011, we made orders as follows consequential upon the publication of our reasons for judgment of the same date (Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2011] FCAFC 119):

1.    The appeal be allowed.

2.    The orders of 12 January 2011 and 10 February 2011 in proceeding no. VID 1227 of 2007 be set aside.

3.    In lieu thereof, the application filed on 21 December 2007 be dismissed with costs as agreed or taxed.

4.    The respondent pay the appellant’s costs of the appeal as agreed or taxed.

2    On 27 September 2011 the appellant, Kooee Communications Pty Ltd (Kooee), filed a notice of motion seeking an order for judgment in its favour in the sum of $3,527,110.26 plus interest and an order that the respondent, Primus Telecommunications Pty Ltd (Primus), pay costs on an indemnity basis after either 29 January or 4 March 2008. The order for judgment is sought by consent on the basis that, pursuant to the orders of the primary judge set aside on appeal, Kooee paid $3,527,110.26 to Primus. As a consequence of Kooee’s success in the appeal it is agreed between the parties that this amount must be repaid with interest. The order for indemnity costs is sought on the basis of two offers to settle the proceeding made by Kooee on 21 January and 4 March 2008 respectively. Primus opposes any order for indemnity costs against it and, instead, contends that Kooee should pay a proportion of its costs of the proceeding at first instance and on appeal in respect of an issue on which Kooee failed, namely that an Anshun estoppel operated against Primus preventing it from bringing the proceeding.

3    Although the order for judgment in Kooee’s favour is proposed by consent, some remarks on its form are appropriate. The proposed order is as follows:

Judgment for the appellant against the respondent for $3,527,110.26 plus interest at the rate prescribed in Order 35 Rule 8 for the purpose of s 52 of the Federal Court of Australia Act 1979 (Cth) from and including 16 February 2011 to the date of payment.

4    These terms reflect the order made in Woolworths Ltd v Strong (No 2) [2011] NSWCA 72 (Woolworths), which Kooee identified as the “most recent appellate-level consideration of the issues underlying an entitlement to an order for restitution of moneys paid under a primary judgment that is overturned on appeal”. In Woolworths at [25] Campbell JA (with whom Handley AJA and Harrison J agreed) noted that there “is ample authority that when a judgment that has been paid in whole or part is reversed on appeal, the appellant is entitled as of right to restitution of the sum paid, with interest”, citing in support Commonwealth v McCormack (1984) 155 CLR 273; [1984] HCA 57 (Commonwealth v McCormack) at 276 (amongst other decisions). In Commonwealth v McCormack, the order made required the respondent to repay to the appellant the sum “paid… in satisfaction of the judgment hereby set aside”.

5    The order proposed by the parties is in terms which they have agreed in circumstances where, as their submissions disclose, each was aware of the decisions in Woolworths and Commonwealth v McCormack. Accordingly, and despite the indication from the parties that they would not object to an alternative order being formulated in terms consistent with the approach in Commonwealth v McCormack, we are content to make the proposed consent order subject only to the substitution of the relevant provision of the Federal Court Rules 2011 (the new Rules), which are now in force. The operation of the new Rules and their relationship with the Federal Court Rules 1979 (the old Rules) is discussed below.

6    The remaining issue is costs. Primus’ position – that Kooee should pay part of its costs (or that the costs order in Kooee’s favour should be reduced) on account of the failure of the Anshun estoppel argument – may be dismissed without difficulty. It is true that there are cases in which it may be appropriate to order a successful party to pay part of an unsuccessful party’s costs or to reduce the costs the successful party may recover where that party has failed on a separate issue (Hughes v Western Australian Cricket Association Inc (1986) ATPR 40-748). However, we are satisfied that this is not such a case.

7    We dealt with the Anshun estoppel issue at [134]-[137] of our principal judgment. As noted at [135], “Primus undoubtedly could have raised the issue of the alleged misleading and deceptive conduct before the Supreme Court of New South Wales” in the earlier proceeding before that Court, and “it would have been far more efficient had Primus done so”. Despite this, we were not satisfied that it “was unreasonable for Primus not to have raised the issue in the Supreme Court of New South Wales as it was of such relevance to the subject-matter of those proceedings” (at [135]-[136]). Accordingly, we concluded that Primus was not estopped from bringing the proceeding (at [137]).

8    It will be apparent from this description that the Anshun estoppel issue may be characterised as separate from the balance of the issues in the proceeding. But this fact alone is insufficient to warrant any departure from the ordinary principle that Kooee, as the successful party, should be compensated by the usual order as to costs in its favour. We do not agree with Primus’ submission that the Anshun estoppel issue “took up a considerable part of evidence and argument, both at trial and on appeal”. To the contrary, our own perception of the appeal is that the Anshun estoppel issue consumed little of the hearing time. As to the trial, the Anshun estoppel issue had been the subject of an earlier interlocutory decision (Primus Telecommunications Pty Ltd v Kooee Communications Pty Ltd [2008] FCA 1027) in which Kooee was unsuccessful and was ordered to pay Primus’ costs. Kooee was also ordered to pay Primus’ costs of Kooee’s unsuccessful application for an extension of time to seek leave to appeal against this interlocutory decision (Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2008] FCA 1316). The position of the parties on the Anshun estoppel issue at the substantive hearing before the primary judge, in truth, merely reflected their positions at the interlocutory hearing. Moreover, neither of the costs orders made against Kooee as a result of the interlocutory hearings has been (or will be) disturbed by reason of Kooee’s success in the appeal.

9    Taking into account these considerations, the appropriate conclusion is that on appeal (and at trial) Kooee was unsuccessful on a single issue which, while separate from the balance of the issues, involved little additional time and effort. Nothing in the circumstances of this case supports the view that fairness dictates any apportionment of costs (in contrast to the circumstances in Bowen Investments Pty Ltd v Tabcorp Holdings Ltd (No 2) [2008] FCAFC 107, on which Primus relied).

10    Kooee’s claim for indemnity costs raises discretionary considerations which are more finely balanced than Primus’ claim for apportionment. Primus commenced the proceeding in December 2007. It served the application and statement of claim on 15 January 2008. On 21 January 2008, the solicitor for Kooee communicated an offer to settle the proceeding on the basis that Kooee would pay its own costs if Primus withdrew its application by close of business on 29 January 2008. The offer was expressed to be made on the basis of the principles in Calderbank v Calderbank [1975] 3 All ER 333. The letter communicating this offer analysed the statement of claim and set out the reasons it was said to be “misconceived and untenable”. These reasons included the fact that Kooee had no obligation to continue to accept services from Primus under the virtual services provider agreement; the terms of the separation deed, which recorded the true basis upon which the commercial relationship between the parties had been terminated; and the lack of any loss or damage suffered by Primus.

11    On 4 March 2008, Kooee made two formal offers of compromise under the then-relevant O 23 of the old Rules. The second offer (which replaced the first) offered to compromise the proceeding by the making of consent orders to the effect that the application and Kooee’s notice of motion relating to the alleged Anshun estoppel be dismissed and there be no order as to costs (so that each party would bear its own costs of the proceeding and the notice of motion). This offer was open for acceptance until 5.00 p.m. on 25 March 2008.

12    There is no evidence suggesting that Primus responded to either the offer of 21 January 2008 or that of 4 March 2008 and, in consequence, the offers lapsed.

13    Under O 23 r 11(6) of the old Rules, if a respondent made an offer of compromise which was not accepted by an applicant and the respondent obtained an order or judgment as favourable to the respondent as or more favourable to the respondent than the offer then, unless the Court otherwise ordered, the respondent would be entitled to an order for costs on the usual basis up to the day of the offer and to an order for indemnity costs thereafter. The old Rules were repealed on 1 August 2011, and from that date the new Rules apply. Rule 1.04(2) of the new Rules provides that the new Rules “apply to a step in a proceeding that was started before 1 August 2011, if the step is taken on or after 1 August 2011”. Rule 1.04(3), however, provides that “…the Court may order that the Federal Court Rules as in force immediately before 1 August 2011 apply, with or without modification, to a step mentioned in subrule (2)”. Rule 25.14 of the new rules is in these terms:

(1)    If an offer is made by a respondent and not accepted by an applicant, and the applicant obtains a judgment that is less favourable than the terms of the offer:

(a)    the applicant is not entitled to any costs after 11.00 a.m. on the second business day after the offer was served; and

(b)    the respondent is entitled to an order that the applicant pay the respondent’s costs after that time on an indemnity basis.

(2)    If an offer is made by a respondent and an applicant unreasonably fails to accept the offer and the applicant’s proceeding is dismissed, the respondent is entitled to an order that the applicant pay the respondent’s costs:

(a)    before 11.00 a.m. on the second business day after the offer was served — on a party and party basis; and

(b)    after the time mentioned in paragraph (a) — on an indemnity basis.

14    As will be apparent from Rule 25.14(2) above, the new Rules expressly deal with the situation where a respondent makes an offer to an applicant (which is not accepted) and the applicant’s proceeding is dismissed. In that event, the presumption that an order for indemnity costs will be made applies if (but only if) the applicant “unreasonably” failed to accept the offer. We use the term “presumption” here because Rule 1.35 of the new Rules provides that the “Court may make an order that is inconsistent with these Rules and in that event the order will prevail”, which is equivalent to the “otherwise orders” provision that appeared in O 23 r 11(6) of the old Rules.

15    It should also be noted that, although the old Rules did not expressly deal with the situation where a respondent makes an offer to an applicant (which is not accepted) and the applicant’s proceeding is dismissed, Rule 25.14(2) of the new Rules largely reflects the principles which had been developed under the old Rules and in accordance with which the discretion as to costs was to be exercised. For example, in Coshott v Learoyd [1999] FCA 276 at [37] Wilcox J noted that:

Where an applicant makes an offer which is not accepted by the respondent and the applicant obtains a judgment not less favourable than the terms of the offer, the applicant is prima facie entitled to have costs on an indemnity basis as from the date of the offer. Where a respondent makes an offer that is not accepted and the applicant obtains a judgment not more favourable than the terms of the offer, the applicant is prima facie entitled to party-party costs until the day after the offer and the respondent to party-party costs thereafter. However, rule 11 does not cover the situation that occurred in this case, where a respondent’s offer is rejected and the applicant is wholly unsuccessful. […]

16    Following a review of relevant decisions, Wilcox J at [46] observed that:

Everybody agrees there can be no fixed rule; a proposition established for this Court by the terms of s 43 of the Federal Court of Australia Act 1976 conferring on the Court a discretionary jurisdiction in relation to costs. Everybody also agrees that, while the ordinary practice is to award costs on a party-party basis, it is sometimes appropriate to take a different course, including ordering indemnity costs against a party who has acted unreasonably.

17    More recently, in McDonald v Parnell Laboratories (Aust) (No 2) (2007) 165 FCR 591; [2007] FCA 2086 Buchanan J dealt with another case in which a respondent had made an offer of compromise which was not accepted and the applicant ultimately failed entirely in its claims. He also reviewed the relevant decisions and at [23] concluded in these terms:

If an offer is made under O 23 and an applicant is partially successful, although falling short of the offer, there is a presumptive right in the respondent to indemnity costs (see O 23 r 11(5)). In the present case the offer was a substantial one. Had Ms McDonald had a good measure of success, but not achieved a result exceeding the offer, the respondent’s presumptive right would have been enlivened. The absence of some provision accommodating the circumstance that an applicant fails altogether is anomalous (see also Seven Network [v News Limited [2007] FCA 1489] at [57]-[59]). Like Sackville J in Seven Network, I regard myself as bound by Dukemaster [Pty Ltd v Bluehive Pty Ltd [2003] FCAFC 1] not to approach the matter on the basis of a presumption, despite the anomaly. Nevertheless, I do not regard it as inconsistent with authority to follow the approach indicated by Wilcox J in Coshott [v Learoyd [1999] FCA 276] which was also referred to with apparent approval in Dukemaster. The respondents therefore have a ‘good start’ but I must also consider whether Ms McDonald was imprudent or (plainly) unreasonable to reject the offer at the time it was made.

18    If there is any material difference between the effect of the old and new Rules, it is that the new Rules make clear that the presumption of indemnity costs is not enlivened in these circumstances unless an applicant has “unreasonably” failed to accept a respondent’s offer of compromise. As we consider this to be effectively the same position as prevailed under the old Rules (despite the concern of some that this might be anomalous), we do not propose to make any order under Rule 1.04(3) displacing any part of the new Rules. Accordingly, the relevant question – at least insofar as the offer of compromise under O 23 is concerned – is whether, having regard to all the circumstances, Primus unreasonably failed to accept Kooee’s offer. As a matter of principle, the same criterion of unreasonableness governs the question whether rejection of the Calderbank offer should result in an order for indemnity costs against an unsuccessful party.

19    In the present case, three circumstances indicate to us that it was not unreasonable for Primus to fail to accept Kooee’s offers of 21 January and 4 March 2008. First, although the letter containing Kooee’s Calderbank offer provided reasons in support of Kooee’s position that Primus’ claim was misconceived, the fact that the judgment on appeal largely accorded with those reasons does not mean that the claim was plainly hopeless or unarguable. Second, and for similar reasons, the fact that both offers were made early in the course of the proceeding, before completion of important interlocutory steps, and were not repeated thereafter is relevant. Third, both offers involved only the smallest possible element of compromise. While Kooee was prepared to pay its own costs to date in each offer, the offers were otherwise made on the basis that Primus should simply walk away from its claim. There is no basis for inferring that, by the time of either offer, Kooee had incurred material costs. In other words, Kooee was seeking not a compromise as such, but an effective capitulation by Primus. The purpose of the principles governing Calderbank offers and offers of compromise in accordance with court rules is to ensure that, when one party makes another an offer that contains a genuine element of compromise, the recipient of the offer is compelled to give real consideration to the costs and benefits of prosecuting its claim by reason of the prospect of suffering an indemnity costs order should its failure to accept the offer prove unreasonable. In the present case, it is difficult to characterise Kooee’s offers as containing a genuine element of compromise sufficient to satisfy the underling purpose of the rules which concern the making of such offers.

20    For these reasons, we are not satisfied that an order for indemnity costs in Kooee’s favour should be made. Order 4 made on 9 September 2011, therefore, will stand. Judgment for Kooee in the agreed sum will otherwise be given in accordance with the proposed consent order, subject to the minor amendment noted above.

Associate:

Dated:    15 November 2011