FEDERAL COURT OF AUSTRALIA

Management 3 Group Pty Ltd (In Liq) v Lenny’s Commercial Kitchens Pty Ltd (No 2) [2012] FCAFC 92

THE COURT ORDERS THAT:

1.    The orders made by Dodds-Streeton J on 10 June 2011 in VID 350 of 2009 be set aside and in lieu thereof:

(a)    the Court declares that the Second Respondent has converted the Additional Goods as defined in paragraph [7] of Management 3 Group Pty Ltd (in liq) v Lenny’s Commercial Kitchens Pty Ltd [2011] FCAFC 162; and

(b)    the Court orders that the Applicants’ application is otherwise dismissed.

2.    Judgment be entered for the Appellants against the Second Respondent in the amount of $298,136.10, being:

(a)    $236,000 for the Appellants’ claim for damages; and

(b)    $62,136.10 for pre-judgment interest pursuant to s 51A(1) of the Federal Court of Australia Act 1976 (Cth) for the period from 7 April 2009 to 25 June 2012.

3.    Paragraph 1 of the orders made by Dodds-Streeton J on 28 June 2011 in VID 350 of 2009 be set aside and in lieu thereof:

(a)    the Applicants pay the First Respondent’s costs of and incidental to the proceeding at first instance on a party and party basis;

(b)    the Second Respondent pay the Applicants’ costs of and incidental to the proceeding at first instance (other than those relating solely to the Kitchen Goods Claim) on a party and party basis to 22 March 2011 and on an indemnity basis thereafter; and

(c)    the Applicants pay the Second Respondent’s costs of and incidental to the proceeding at first instance relating solely to the Kitchen Goods Claim on a party and party basis.

4.    The Appellants pay the Second Respondent’s costs thrown away by the amendment of the Notice of Appeal on 1 August 2011 pursuant to leave granted by Gray J on 19 July 2011 on a party and party basis.

5.    Subject to paragraph 4, the Second Respondent pay the Appellants’ costs of the appeal on an indemnity basis.

6.    To the extent (if any) that the amount to be paid by the Applicants to the Second Respondent pursuant to paragraphs 3(c) and 4 above (after set-off of the amounts to be paid by the Second Respondent to the Applicants pursuant to paragraphs 3(b) and 5 above) (the Sum) is less than $182,500, the Second Respondent pay that Sum and pay interest on that Sum at the Reserve Bank of Australia cash rate plus 4% from 28 June 2011 until the date of payment.

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

REASONS FOR JUDGMENT

THE COURT:

1    On 12 December 2011 this Court published its reasons for concluding that the appellants’ appeal ought to be allowed; the judgment of the primary judge set aside; and in lieu thereof that the appellants be awarded the sum of $236,000 for the conversion by the second respondent of the appellants’ goods on 7 April 2009 (the Additional Goods).

2    At the time the Court’s reasons were handed down the parties were invited to bring in short minutes of order to address the question of pre-judgment interest and the costs of the proceeding before the primary judge and of the appeal.

3    For reasons that are not explained, the appellants did not respond to the Court’s invitation until 27 February 2012, when they filed an affidavit of their solicitor to which was exhibited an offer of compromise, which had been made by the appellants to the second respondent on 22 March 2011, and the second respondent’s response acknowledging receipt of the offer of compromise.

Pre-judgment Interest – The Legislation

4    The appellants’ cause of action arose on 7 April 2009. They commenced this proceeding on 8 May 2009.

5    The appellants claim pre-judgment interest pursuant to s 51A(1)(a) of the Federal Court of Australia Act 1976 (Cth) (FCA). That section provides:

(1)    In any proceedings for the recovery of any money (including any debt or damages or the value of any goods) in respect of a cause of action that arises after the commencement of this section, the Court or a Judge shall, upon application, unless good cause is shown to the contrary, either:

(a)    order that there be included in the sum for which judgment is given interest at such rate as the Court or the Judge, as the case may be, thinks fit on the whole or any part of the money for the whole or any part of the period between the date when the cause of action arose and the date as of which judgment is entered; or

(b)    without proceeding to calculate interest in accordance with paragraph (a), order that there be included in the sum for which judgment is given a lump sum in lieu of any such interest.

(2)    Subsection (1) does not:

(a)    authorize the giving of interest upon interest or of a sum in lieu of such interest;

…

(3)    Where the sum for which judgment is given (in this subsection referred to as the relevant sum) includes, or where the Court in its absolute discretion, or a Judge in that Judge’s absolute discretion, determines that the relevant sum includes, any amount for:

(a)    compensation in respect of liabilities incurred which do not carry interest as against the person claiming interest or claiming a sum in lieu of interest;

(b)    compensation for loss or damage to be incurred or suffered after the date on which judgment is given; or

(c)    exemplary or punitive damages;

interest, or a sum in lieu of interest, shall not be given under subsection (1) in respect of any such amount or in respect of so much of the relevant sum as in the opinion of the Court or the Judge represents any such amount.

(4)    Subsection (3) shall not be taken to preclude interest or a sum in lieu of interest being given, pursuant to this section, upon compensation in respect of a liability of the kind referred to in paragraph (3)(a) where that liability has been met by the applicant, as from the date upon which that liability was so met.

Pre-judgment Interest – The Parties’ Contentions

6    The appellants contended that they should be awarded pre-judgment interest on the sum of $236,000 from the date the cause of action arose to 10 June 2011, being the date the trial judge entered judgment at first instance. While the usual rule is that the Full Court’s judgment is effective from the date of entry, the appellants submitted that this Court’s judgment should be antedated nunc pro tunc to the date of the trial judge’s judgment: r 39.01 of the Federal Court Rules 2011 (Cth) (Rules).

7    The appellants contended that the sum should bear interest at the rate provided for in the Penalty Interest Rates Act 1983 (Vic) (Penalty Interest Rate Act), being 10% from 7 April 2009 to 31 January 2010 and 10.5% thereafter. Pursuant to s 51A(1)(a) of the FCA, the Court has a discretion to award pre-judgment interest at such a rate as it thinks fit. The appellants listed several factors which they submitted weighed in favour of the rate prescribed by the Penalty Interest Rate Act. They further contended that this Court should not have regard to Practice Note CM16, because the procedure in the Court has been to award pre-judgment interest at the prevailing interest rate in the particular State in which the proceeding is heard, being in this case the Penalty Interest Rate Act. The appellants called this the “GEC Marconi practice”, being a reference to the decision in GEC Marconi Systems Pty Ltd (t/as Easams Australia) v BHP Information Technology Pty Ltd (2003) 201 ALR 55 at [7].

8    Practice Note CM16 relevantly provides:

2.    Practitioners and litigants should expect that where, pursuant to section 51A(1)(a), interest in respect of a pre-judgment period is to be included in a judgment, the Court will have regard to the following rates, being rates agreed upon by the Discount and Interest Rate Harmonisation Committee established following a referral by the Council of Chief Justices of Australia and New Zealand:

(a)    in respect of the period from 1 January to 30 June in any year – the rate that is 4% above the cash rate last published by the Reserve Bank of Australia before that period commenced, and

(b)    in respect of the period from 1 July to 31 December in any year – the rate that is 4% above the cash rate last published by the Reserve Bank of Australia before that period commenced.

9    The second respondent on the other hand contended that interest should only run from 18 December 2009 when the appellants amended their statement of claim to include a claim for conversion of the Additional Goods which was the subject matter of the appeal. Prior to that time the claim was for other goods only. Secondly, it said that the rate of interest should be assessed by reference to Practice Note CM16 but that, in any event, the Court retained a discretion as to the amount and calculation of interest under s 51A of the FCA. The second respondent conceded that interest should run until the date upon which this Court enters judgment.

Pre-judgment Interest – The Court’s Previous Practice

10    The appellants are correct to say that there are decisions of single judges of this Court which have adopted the practice of awarding pre-judgment interest at the prevailing interest rate in the particular State in which the proceeding is heard and in some cases in accordance with penalty interest rates.

11    In EMCL Pty Ltd v Esanda Finance Corporation Ltd (No 2) (1998) 160 ALR 382, Heerey J, after referring to a decision of Davies J in Namol Pty Ltd v AW Baulderstone Pty Ltd (No 2) (1993) 47 FCR 388 at 389, and to two decisions of Burchett J in Alec Finlayson Pty Ltd v Armidale City Council (unreported, Burchett J, 6 March 1998) and Kettle Chip Company Pty Ltd v Apand Pty Ltd (No 2) (1998) 83 FCR 466, and a decision of Nicholson J in Nagy v Masters Dairy Ltd (1996) 150 ALR 273, all of which followed Davies J’s decision, said at 384:

I think there is obvious practical value in having the Federal Court applying the same interest rate as would be applied in litigation in the same State in which the case is being heard. It would be undesirable for there to be distinctions drawn from State to State, depending on whether it was thought the regime in any particular State did or did not impose a commercial rate of interest.

12    Justice Heerey’s decision was followed by Weinberg J in McCormick v Riverwood International (Australia) Pty Ltd [2000] FCA 32 at [14]-[17].

13    In GEC Marconi Systems 201 ALR 55, Finn J, after referring to s 51A, said at [7]:

No rate of interest is fixed or prescribed by the section and the court has not, by practice direction or otherwise, sought to provide guidance on what might be considered an appropriate rate to be applied. Though the matter is, and remains, one of judicial discretion, the usual practice that has been followed in applying s 51A has been to adopt the rates of interest applied by the Supreme Court of the state or territory in which this court is dealing with the matter (Namol Pty Ltd v A W Baulderstone Pty Ltd (No 2) (1993) 47 FCR 388; 119 ALR 187; Kettle Chip Co Pty Ltd v Apand Pty Ltd (No 2) (1998) 83 FCR 466; 155 ALR 134; H K Frost Holdings Pty Ltd (in liq) v Darvall McCutcheon (a firm) [1999] FCA 795; BC9903352 (H K Frost Holdings Pty Ltd); McCormick v Riverwood International (Aust) Pty Ltd [2000] FCA 32; BC200000071) unless there is evidence that those rates are penal or not commercial (EMCL Pty Ltd v Esanda Finance Corp Ltd [1999] FCA 978; BC9904104). The practice itself is one from which there has been occasional departure: see, for example, White Industries (Qld) Pty Ltd v Flower & Hart (No 2) (2000) 103 FCR 559; 177 ALR 567.

14    Justice Finn followed that practice because no rate of interest had been prescribed and because there was then no practice direction that offered guidance. He also said that the Court would not follow that procedure if the rates to be applied were “penal or not commercial”.

15    Justice Goldberg refused to follow that practice in White Industries (Qld) Pty Ltd v Flower & Hart (2000) 103 FCR 559 awarding interest at the rate prescribed by then O 35 r 8 of the Federal Court Rules 1979 (Cth) which was the rate to be applied for interest payable on a judgment after a judgment has been entered pursuant to s 52(2)(a) of the FCA.

16    For the reasons which follow the practice identified by Davies J and followed in the decisions cited should not be followed. The suggested practice identified by Goldberg J should also not be followed.

Pre-judgment Interest – The Period over which Pre-judgment Interest Runs

17    Interest should run from the date the cause of action arises, unless good cause is shown to the contrary: s 51A(1)(a). The appellants’ cause of action arose on the date the second respondent converted the Additional Goods, which was 7 April 2009. Whilst the appellants did not make a demand in respect of the Additional Goods until 18 August 2009 or make a claim for conversion of the Additional goods until 18 December 2009, that is not in our opinion a reason to find that there is good cause why interest should not run from the date the FCA suggests: Kazar v Kargarian (2011) 197 FCR 113 at [96]-[97].

18    Pre-judgment interest runs until “the date as of which judgment is entered”: s 51A(1)(a). For the reasons which follow, in our view, judgment has not been entered in relation to the Additional Goods. There are three alternative dates on which it might be suggested that “judgment is entered” or should be taken to have been entered:

1.    10 June 2011, when the trial judge dismissed the appellants’ claims;

2.    12 December 2011, when this Court ordered that the appeal be allowed and that the appellants bring forward short minutes of order; or

3.    some future date on which judgment for the appellants is “entered”.

19    First, the relevant date cannot be 10 June 2011. This Court has the power to, among other things, affirm, reverse or vary a judgment at first instance: s 28 of the FCA. There is an important distinction between an affirmation of the trial judge’s decision, on the one hand, and a reversal or a variation, on the other. In the latter case, “[t]he judgment is not ipso facto antedated by reason that it is substituted for the judgment in the Court below”: Borthwick v The Elderslie Steamship Company Limited (No 2) [1905] 2 KB 516 at 519; cited in Nicol v Allyacht Spars Pty Ltd (No 2) (1988) 165 CLR 306 at 309-10. In this case, the judgment of this Court effectively reversed the decision of the trial judge, at least with respect to the second respondent. For that reason, the relevant date is not the date on which the trial judge dismissed the appellants’ claims.

20    Second, the relevant date cannot be 12 December 2011. Section 51A(1)(a) refers to “the date as of which the judgment is entered”. It is important to distinguish, as a matter or parlance, between the giving of judgment, on the one hand, and the entry or authentication of judgment, on the other: see Holtby v Hodgson (1889) 24 QBD 103 at 107. Division 39.4 of the Rules governs the entry of judgments and orders. The parties did not address submissions or argument as to when the Court’s 12 December 2011 orders were “entered” in that sense. That question is irrelevant for present purposes, however, because the decision of this Court on 12 December 2011 did no more than allow the appeal and request that the appellants bring forward short minutes of order. Even if this Court’s 12 December 2011 judgment was capable of being entered, that judgment did not order the second respondent to pay the appellants any sum of money upon which interest could be calculated. While we stated at [80] that “we would allow the appeal and enter a judgment for M3G in the amount claimed”, the orders contemplated that the appellants would bring forward a short minute of orders to reflect that decision and that it would be those further orders which actually effected the judgment. That has not yet occurred. As s 51A(1) makes clear, a judgment including pre-judgment interest must expressly calculate and incorporate that amount or order that there be included in the sum for which judgment is given a lump sum in lieu of any such interest. Having not done so, it cannot be the case that this Court’s 12 December 2011 judgment gave rise to an obligation upon the second respondent to pay damages, including pre-judgment interest, which was capable of being “entered”.

21    For the reasons given, interest should run from the date the cause of action arose, 7 April 2009, until the date upon which this judgment is entered by this Court for an amount which includes pre-judgment interest.

Pre-judgment Interest – The Amount upon which the Interest Runs

22    If the judgment includes compensation for loss or damage to be suffered after the award is made no interest should be awarded on that part of the award: s 51A(3).

23    In cases where damages are incurred after the date the cause of action arose but before the date of the award, interest should run from the date the damage is suffered until the date of judgment. The applicant will not have been kept out of the applicant’s money until the damage has been suffered. In such a case “good cause to the contrary” will have been established: s 51A(1).

24    In this case however those issues do not arise because the damage was suffered at the date the cause of action arose and the appellants’ damages have been assessed in the dollar value at the date the cause of action arose.

Pre-Judgment Interest – The Rate

25    Pre-judgment interest is awarded to compensate an applicant for being kept out of the applicant’s money by the respondent’s refusal to pay that which the Court at trial orders to be paid, and not to punish the respondent for the respondent’s refusal to pay: Batchelor v Burke (1981) 148 CLR 448 at 455 per Gibbs CJ; Thompson v Faraonio (1979) 24 ALR 1 at 7. The rate at which interest is payable is the subject of the Court’s discretion under s 51A(1)(a): Kazar 197 FCR 113 at [97]. Because the award of pre-judgment interest is intended to be compensatory, the interest rates provided for in the Penalty Interest Rate Act have no application. The proper rate of interest to be applied should be the rate prevailing from time to time in the market place which would represent the cost of the money to a successful applicant. The Court has suggested in Practice Note CM16 that that rate is 4% above the cash rate fixed by the Reserve Bank. In our opinion that rate is a rough and ready guide of the prevailing interest rate at any given time and should be applied in relation to pre-judgment interest on any award which has been calculated as at the date that the cause of action arose.

26    Practice Note CM16, as its terms disclose, has regard to rates agreed upon by the Discount and Interest Rate Harmonisation Committee established following a referral by the Council of Chief Justices of Australia and New Zealand.

27    The rates applied by the Courts across Australia are now informed by the determination of that Committee. The State Courts, perhaps with the exception of the Victorian Courts, because of the provision of the Penalty Interest Rate Act, will also be fixing their interest rates by reference to that Committee’s determination.

28    But in any event, as this Court is a national Court, the interest rates that are applied for pre-judgment interest should be uniform across the Court.

29    The practice adopted by the Court in the authorities to which we have referred should no longer be followed. In any event, there are numerous contemporaneous decision which do not follow the “GEC Marconi practice” (and, in most cases, do not refer to it) and instead apply Practice Note CM16: Lactos Fresh Pty Ltd v Finishing Services Pty Ltd (No 2) [2006] FCA 748; Rafferty v Time 2000 West Pty Ltd (No 5) [2010] FCA 873; AA Shi Pty Ltd v Avbar Pty Ltd (No 5) [2010] FCA 971; Primus Telecommunications Pty Ltd v Kooee Communications Pty Ltd [2011] FCA 8; Fair Work Ombudsman v Ramsey Food Processing Pty Ltd (2011) 198 FCR 174; Markets Nominees Pty Ltd v Commissioner of Taxation [2012] FCA 262.

30    In cases where damages are assessed at trial by reference to the dollar value at trial, pre-judgment interest must be adjusted by reducing the interest rate otherwise to be applied to reflect that part of the interest rate which includes the fear and expectation of inflation over the period between the date the cause of action arose and the entry of judgment: Todorovic v Waller (1981) 150 CLR 402; Wheeler v Page (1982) 31 SASR 1; MBP (SA) Pty Ltd v Gogic (1991) 171 CLR 657. If damages are assessed as at the trial date the damages will include the inflationary interest rate that has prevailed in the period between the date the cause of action arose and the assessment of damages. For that reason the applicant should not have the benefit of both inflation over that period in the assessment of damages and that part of the interest rate that represents the fear and expectation of inflation.

31    If the parties have agreed on an interest rate that is to be applied when one party defaults on the agreement, usually that rate will be applied unless of course it amounts to a penalty.

Pre-judgment Interest – The Discretion

32    The Court should make an award of pre-judgment interest unless good cause is shown to the contrary: s 51A(1). The section does not give any guidance to what would amount to good cause. Without in any way attempting to limit the reach of the section there are at least three circumstances where a Court might think good cause has been made out. First, if the applicant has been guilty of delay of a kind which makes it unjust for the applicant to have interest on the judgment during the period of the delay. However, delay simpliciter is not enough to necessarily prevent an applicant from obtaining an award of interest because the respondent has continued to have the benefit of the use of the money during the period of the delay: Kazar 197 FCR 113; Kalls Enterprises Pty Ltd (In liquidation) v Baloglow (No 3) [2007] NSWCA 298.

33    Secondly, if the applicant has been otherwise compensated or indemnified in respect of the damage so that the applicant has not been kept out of his or her money. In Batchelor v Burke (1981) 148 CLR 448, the plaintiff sued a party who was not his employer in respect of his injuries for which he received worker’s compensation from his employer. The High Court held that no interest should be awarded in respect of the damages for which the applicant had received worker’s compensation.

34    Thirdly, where the applicant has sought and been awarded damages which include damages for loss of use of the money: Hungerfords v Walker (1989) 171 CLR 125. If the applicant were to receive both damages for loss of use of the money and interest the applicant would be compensated twice for being out of his or her money.

35    If the applicant is entitled to interest the Court retains a residual discretion as to the interest rate, but speaking generally the Court should have regard to the matters to which we have referred on that question.

Pre-judgment Interest – The Calculation and the Judgment

36    Section 51A provides that an award of pre-judgment interest shall “be included in the sum for which judgment is given”. In those circumstances, judgment should not be entered in favour of an applicant until such time as the amount of pre-judgment interest has been calculated so that it can be included in the judgment. The amount of interest which should be included pursuant to s 51A, being interest at the rate of 4% above the cash rate last published by the Reserve Bank of Australia prior to each six month period (or part thereof) from 7 April 2009 until 25 June 2012, is set out below:

37    The judgment made on 12 December 2011 in favour of the appellants for $236,000 should be recalled. In lieu thereof the appellants should have judgment for $298,136.10, which includes pre-judgment interest. Pursuant to r 39.34, the Court directs that an order for that amount be entered on 25 June 2012.

Post-judgment Interest

38    Thereafter, for the period from 25 June 2012 until the date of payment by the second respondent, the appellants will be entitled to post-judgment interest. Section 52 addresses that question and provides that a judgment debt carries interest from the date on which the judgment is entered at such rate as is fixed by the Rules. The relevant rule is r 39.06. That rule provides, like Practice Note CM16, for two periods in each year for the calculation of interest but, unlike Practice Note CM16, r 39.06 prescribes the rate at 6% above the cash rate last published by the Reserve Bank of Australia.

39    The reason why the interest rate in r 39.06 is higher than the interest rate in Practice Note CM16 is because the Court expects to see its judgments satisfied as quickly as possible. The higher interest rate is chosen to encourage the unsuccessful respondents to comply with the Court’s orders.

40    In our opinion, the appellants are entitled to interest at the rate of 6% above the cash rate last published by the Reserve Bank for the relevant period between 25 June 2012 and the date of payment: s 52(1). The interest payable on the judgment will depend upon when the judgment is satisfied by the respondent. It is unnecessary for this Court to calculate that interest. The issue may never arise. That is an issue for the parties.

Costs

41    On 22 March 2011, the appellants offered to compromise the claim against the second respondent in the sum of $110,000 which comprised the sum of $91,776.67 plus interest in the sum of $18,223.33, the interest having calculated at the rate of 10% per annum for the period 17 April 2009 (which should have been 7 April 2009) to 31 January 2010, and thereafter at 10.5% per annum plus its costs.

42    The order which this Court has indicated it will make when judgment is entered is more than twice the amount for which the appellants sought to compromise.

43    At trial the primary judge ordered the appellants to pay the second respondent’s costs. There is no dispute that that order needs to be set aside. However, the parties were apart as to the apportionment of costs and the appropriate order for indemnity costs consequent upon the offer of compromise.

44    First, the appellants should have their costs of the trial and of the appeal in relation to the Additional Goods claim. The appellants were unsuccessful in relation to and did not appeal from trial judge’s decision concerning the Kitchen Goods. For that reason, the appropriate costs order ought to exclude those costs which related solely to the Kitchen Goods claim at first instance.

45    Second, the appellants should have their costs of the trial on an indemnity basis after 22 March 2011, when the offer of compromise was served. The appellants also ought to have their costs of the appeal on an indemnity basis because the offer was never withdrawn.

Security for Costs

46    On 6 April 2011, the primary judge ordered the appellants to provide security for the past and future costs of the second respondent in the sum of $182,500. That amount was paid into Court and on 28 June 2011 the primary judge ordered that the security be released to the second respondent by way of interim and partial satisfaction of the costs order made by the primary judge after the trial had concluded that the appellants pay the second respondent’s costs of the proceeding on a party and party basis.

47    The appellants contended that the orders of this Court will mean that the costs to which the second respondent is entitled will be less than $182,500. The second respondent was of the view that its entitlement to costs would exceed $182,500.

48    The orders made by the primary judge had the effect of requiring the appellants to pay the second respondent $182,500 in partial satisfaction of the second respondent’s costs to be taxed. The second respondent has had the use of that money and, insofar as the amount paid exceeds the second respondent’s entitlement to the costs of the proceeding after setting off the appellants’ entitlement to its costs of the proceeding made as a consequence of these reasons, the sum should be repaid and bear interest.

49    The sum should bear interest because the second respondent has had the use of the appellants’ money since 28 June 2011. The appellants would not be entitled to interest on the sum whilst the money remained in Court because the sum would have earned interest in that time and would be accounted for by the order to repay the amount to the appellants. The appropriate rate of interest is the rate set out in Practice Note CM16.

Associate:

Dated:    25 June 2012