FEDERAL COURT OF AUSTRALIA

Specsavers Pty Ltd v The Optical Superstore Pty Ltd [2012] FCAFC 183

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The appellant pay the respondents’ costs of and incidental to the appeal, such costs to be taxed if not agreed.

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

REASONS FOR JUDGMENT

THE COURT:

overview

1    This appeal involves a challenge to the primary judge’s decision rejecting the claim of the appellant (Specsavers) for indemnity costs in relation to a proceeding for the assessment of damages on an undertaking as to damages, following the failure of the first respondent (TOS) to accept an offer of compromise made in September 2011 and served under the Federal Court Rules 2011 (Cth) (Rules).

2    On the hearing of the appeal two grounds were pressed. First, that the primary judge erred in finding that the offer of compromise was ambiguous, in having regard to earlier offers made in the course of the main proceeding, and in failing to give effect to R 25.14(1) of the Rules. For this purpose, Specsavers was treated as the respondent and TOS as the applicant.

3    Secondly, that the primary judge erred in failing to give proper effect to s 37M and s 37N of the Federal Court of Australia Act 1976 (Cth) (FCA Act) in light of the findings she made about the conduct of TOS, when the primary judge ought to have held that TOS’s failure to accept the offer of compromise was unreasonable in circumstances where it failed to make any contemporaneous enquiries as to the scope of the offer.

4    On appeal, the Court is not satisfied that either ground is made out and dismisses the appeal with costs.

Background

5    In the main proceeding, Specsavers alleged that two television commercials of TOS, called for the sake of convenience the Standard TVC and the Tailor-made TVC, contravened s 52(1) and s 53(e) of the Trade Practices Act 1974 (Cth) (TPA) as it then applied.

6    On 9 February 2010, Specsavers obtained from Edmonds J ex parte interlocutory injunctions restraining TOS from broadcasting, publishing, causing to be published or making available to consumers the Standard TVC and from making certain representations which the Standard TVC was alleged to convey. Specsavers gave an undertaking as to damages in the usual form in support of that relief.

7    On 16 March 2010, Specsavers served an offer of compromise on TOS.

8    From 29 March to 7 April 2010, the primary judge heard the liability issues in the main proceedings and, on 4 June 2010, gave judgment on liability: Specsavers Pty Ltd v The Optical Superstore Pty Ltd (No 2) [2010] FCA 566. The primary judge held that, while in one respect the Tailor-made TVC contravened the TPA, the Standard TVC did not and, accordingly, discharged the interlocutory injunctions which Edmonds J had granted. Costs of this first part of the proceeding were reserved.

9    Following delivery of the judgment on liability, Specsavers did not press its claims for relief in the proceeding, save in relation to costs.

10    On 7 December 2010, after a further offer of compromise from Specsavers dated 9 June 2010, a mediation, and a Calderbank offer by Specsavers dated 18 October 2010, directions were made for the parties to file and serve evidence in relation to the claim of TOS to damages on the undertaking.

11    On 7 September 2011, Specsavers served on TOS another offer of compromise (the September 2011 offer) (the details of which are set out below), which expired on 21 September 2011. Between 16 and 19 September 2011, Specsavers filed and served its evidence against TOS’s claim, although its expert accounting report was not made available to TOS until 22 September 2011. On 20 October 2011, the licensees from TOS were joined as parties to the proceeding for the purpose of pursuing their claims on the undertaking as to damages.

12    Between 16 and 18 November 2011 and on 7 and 8 December 2011, the primary judge conducted a hearing to determine: (1) TOS’s and the licensees’ claims to damages on the undertaking; and (2) how the costs of the first part of the proceeding, up to and including the judgment on liability, should be awarded.

13    On 17 May 2012, the primary judge delivered judgment on those two issues: Specsavers Pty Ltd v The Optical Superstore Pty Ltd (No 3) [2012] FCA 504; (2012) 290 ALR 263. The primary judge:

(1)    made findings which enabled the damages Specsavers was liable to pay TOS and the licensees pursuant to the undertaking to be calculated by the parties’ accounting experts using an agreed model;

(2)    ordered that TOS pay 30% of Specsavers’ costs of the first part of the proceeding and that Specsavers pay 70% of TOS’s costs of that first part of the proceeding.

14    On 8 June 2012, the primary judge made a consent order, based on the calculations of the parties’ accounting experts, that Specsavers pay to TOS and the licensees $90,636 by way of damages and interest for their claims on the undertaking.

the primary judge’s decision on costs of damages hearing

15    On 20 June 2012, the primary judge conducted a hearing in relation to the costs of the damages hearing. On 21 June 2012, her Honour delivered judgment, ordering Specsavers to pay 65% of both TOS’s and the licensees’ costs of their claims: Specsavers Pty Ltd v The Optical Superstore Pty Ltd (No 4) [2012] FCA 652. This is the judgment now appealed from.

16    The primary judge approached the costs issue, first, on the basis of costs payable up until the September 2011 offer of compromise was made, and secondly, in respect of the costs payable after the offer was made.

17    The primary judge noted that that offer, which was open for 14 days, took the following form:

1.    [Specsavers] pay [TOS] the sum of $100,000 (inclusive of GST, if any);

2.    [Specsavers] pay [TOS’s] costs of the proceedings in respect of the Standard TVC on a party/party basis;

3.    [TOS] pay [Specsavers] costs of the proceedings in respect of the Tailor-made TVC on a party/party basis; and

4.    The proceedings otherwise be dismissed.

18    The primary judge noted that no further offer of compromise had been made despite the fact that on 20 October 2011 the licensees were added as second to eighth respondents.

19    The primary judge noted, at [8] of her reasons for judgment, that the Court has a general discretion as to costs under s 43 of the FCA Act, which must be exercised judicially and not against a successful party except where there is a reason for doing so that is connected with the case. Her Honour noted that ordinarily costs follow the event and that a successful litigant should recover their costs, unless there are special circumstances justifying a different order, as observed in Ruddock v Vadarlis (No 2) [2001] FCA 1865; (2001) 115 FCR 229 at [9], [11] (per Black CJ and French J).

20    The primary judge then noted, at [9], that R 25.14(1) of the Rules provides that:

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 am 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.

21    The primary judge accepted that, despite the terminology, R 25.14(1) creates a rebuttable presumption in favour of, rather than an entitlement to, indemnity costs where the conditions triggering the operation of the Rule are made out, referring to Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd (No 2) [2011] FCAFC 141, where it was held that by R 1.35 the Court may make an order inconsistent with the Rules, including R 25.14. Nonetheless, her Honour noted that the onus is on the party resisting an order to show why it should not be made, as noted in Futuretronics.com.au Pty Ltd v Graphix Labels Pty Ltd [2009] FCAFC 40 at [10] in respect of a similar rule under the old Rules (Federal Court Rules 1979 (Cth)).

22    The primary judge then stated that the questions that arose were: whether TOS was in fact successful on the damages assessment; whether it had acted unreasonably; whether the September 2011 offer was an offer of compromise under the Rules; and, if so, whether the sum awarded was less favourable than the terms of the offer.

23    The primary position of Specsavers was that it did not rely on the first offer of compromise made in the proceedings, but rather claimed that TOS had acted unreasonably in declining to respond to several offers and for this reason should recover no costs of the damages proceeding. Specsavers in this regard relied on s 37M(3) of the FCA Act, contending that that section requires that the discretion to award costs must be exercised in the way that best promotes the overarching purpose of civil procedure, which by s 37M(1) is to “facilitate the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible”. Specsavers also submitted to the primary judge that parties have a duty to conduct proceedings (including settlement negotiations) in a way that is consistent with the overarching purpose, as provided for by s 37N(1). Specsavers contended that the lawyers of the parties were required to take account of that duty and assist their clients to comply with it, as provided for by s 37N(2).

24    The primary judge accepted, at [25] of her reasons for judgment, that in exercising the discretion to award costs she was obliged to take into account any failure to comply with the duty imposed by s 37N(1) or (2) on the parties and their lawyers.

25    Before the primary judge, on behalf of TOS, senior counsel submitted that the first offer referred to was unreasonable because it made no allowance for the costs of TOS, although Specsavers had failed in its claim concerning the Standard TVC. Her Honour noted, at [27], that it also made no allowance for damages on the undertaking. Her Honour further noted that a second offer (not the September 2011 offer) purported to cover both costs and compensation under the undertaking, although in an amount TOS considered unreasonable.

26    The primary judge, at [28], then noted that whether or not the Specsavers’ offers were unreasonable did not seem to her to bear upon TOS’s conduct. Her Honour observed that:

Even if they were, that would not excuse its silence in the face of the several overtures Specsavers made to settle the proceeding. The Optical Superstore appears to have treated Specsavers’ offers with contempt. It chose not to dignify any of them with a response.

27    Her Honour then added, at [28]:

A party genuinely committed to conducting a proceeding in a way that is consistent with the overarching purpose would, at least, respond to an offer of settlement.

28    Her Honour, at [28], further criticised TOS for failing to engage in the process of seeking to resolve the whole of the undertaking proceeding. In the absence of any evidence to explain its position, her Honour said, she was not able to draw any inference in favour of TOS to the effect that it may have thought that Specsavers’ offers indicated that any negotiations were likely to prove fruitless.

29    The primary judge, at [29], then found that, as a result of TOS’s apparent “intransigence” the parties were put to considerable expense and the proceedings were protracted.

30    Her Honour also noted that R 40.08 of the Rules enables a party to apply to the Court for an order that any costs and disbursements payable to another party be reduced by an amount specified by the Court where the applicant has claimed damages and been awarded a sum less than $100,000. Her Honour noted that Specsavers did not invoke the Rule but that it was open to the Court to exercise that power on its own initiative, having regard to R 1.40. Her Honour also noted that O 62, rule 36A(1) of the old Rules, which applied when the main proceeding commenced and when TOS indicated it would enforce the undertaking, provided for an automatic one-third reduction in costs (including disbursements) unless the Court or a judge otherwise ordered.

31    In these circumstances, in relation to the costs of the damages proceeding up to the September 2011 offer, her Honour ordered, at [31], that TOS should recover its costs but there should be a reduction to reflect the size of the award it achieved (being less than $100,000) and the fact that the costs necessarily incurred were out of proportion to the amount recovered, and therefore the value of the claim. Her Honour expressly stated that the order should also reflect the failure of TOS to fulfil its duty under s 37N. She therefore proposed that Specsavers pay TOS 65% of its costs and disbursements up to the September 2011 offer.

32    At [32], the primary judge began her consideration of the question of costs in respect of the period after the September 2011 offer was made. Her Honour said that, for the purposes of R 25.14(1), the first question was whether the judgment was less favourable than the terms of the offer. Her Honour accepted, at [33], that, in that regard, the offer must be read as a whole.

33    On behalf of TOS, senior counsel argued that the offer unambiguously made no allowance for the costs of the second part of the proceeding dealing with the assessment of damages on the undertaking and, for this reason, the judgment was not less favourable than the terms of the offer, it being reasonable to assume that the successful party would recover its costs in addition to its damages. Alternatively, senior counsel submitted, the offer was ambiguous in its terms and the ambiguity should be resolved in favour of TOS.

34    On behalf of Specsavers, senior counsel submitted that the offer provided in effect for the costs of all the proceeding relating to the Standard TVC and that necessarily included the claim for damages under the undertaking, and so on any view of the matter the offer was more favourable than the amount awarded to the respondents.

35    At [35], her Honour rejected the primary argument of TOS that the offer was unambiguous but accepted that it was ambiguous. Her Honour accepted that the question of the costs of the first, liability part of the proceeding remained to be determined at the time the September 2011 offer was made. While accepting it was possible to read Specsavers’ offer in the way it contended, her Honour considered the references to the costs of the proceedings in respect of the two TVCs could be construed as references to the costs of the first part of the proceeding only, and not to encompass the costs of the claim under the undertaking. Her Honour then added: “A careful reading of the earlier offers gives rise to the inference that this was Specsavers’ intention”.

36    Her Honour said, at [36], that by the time the September 2011 offer was made, the bulk of TOS’s costs had been incurred. Her Honour said that because she was persuaded that the offer “did not make provision for the costs of the claim under the undertaking”, she was not satisfied the judgment was less favourable than the terms of the offer. Her Honour added that that did not mean that the offer should necessarily be ignored. She said that it could be taken into account in the exercise of the Court’s discretion. But she finally considered that, in all the circumstances and having regard to the level of costs likely to have been incurred by the point in time when the offer was made, she did not think that it could be said that TOS was imprudent or unreasonable in failing to accept it.

37    In the result her Honour, at [37], rejected Specsavers’ claim for indemnity costs from 9 September 2011 and found that it followed that TOS’s costs of the claim should be paid “on the same basis as before”, being a reference to the costs order that she had already found to be appropriate up to the time that the September 2011 offer was made.

Whether the september 2011 offer was ambiguous

38    Specsavers presses two grounds of appeal, both directed at the primary judge’s rejection of its claim that it should have been awarded indemnity costs in light of the September 2011 offer of compromise. The first ground pressed is ground 2, where it is said the primary judge erred:

(1)    in finding that the appellant’s September 2011 offer of compromise was ambiguous;

(2)    in taking into account the terms of two earlier offers (dated 9 June 2010 and 18 October 2010) in construing the September 2011 offer of compromise; and

(3)    in failing to give effect to R 25.14(1) of the Rules.

39    In our view her Honour was correct when she rejected the submission advanced by TOS that the offer unambiguously did not include costs of the second part of the proceeding and instead found that the offer was ambiguous. The references to the costs of the proceedings in respect of the two TVCs could be construed as references to the costs of the first part of the proceeding only and not to encompass the costs of the claim made under the undertaking.

40    In so finding, it is unnecessary to have any regard to any of the earlier offers made by Specsavers to TOS in the course of the main proceeding. Her Honour’s reference, at [35], to an inference arising as to Specsavers’ intention in that regard from a careful reading of the earlier offers, may be regarded as a mere observation.

41    As can be seen from the history of the main proceeding, by the time the September 2011 offer was made, the outstanding issues, in respect of which the September 2011 offer might be considered to relate, were the question of costs on the first, liability part of the proceeding (which the primary judge had not yet ruled on) and the question of assessment of damages on the undertaking – as well as the costs that would necessarily be associated with the assessment of damages.

42    In those circumstances, the use of the expression “the remaining issues in this proceeding”, which was used both in the September 2011 offer and in the covering letter that accompanied it, could reasonably have been thought to have related to each of those issues. On the other hand, the references to the costs of the proceedings in respect of the two TVCs could be construed as references to the costs of the first part of the proceeding only and not to encompass the costs of the claim on the undertaking.

43    Accordingly, we reject Specsavers’ submission on the appeal, that the September 2011 offer was unambiguously an offer that included an offer that Specsavers would pay the costs of TOS on the damages assessment proceeding up to the time the settlement offer of $100,000 was accepted.

44    As to the earlier offers, as noted above, it may be said that her Honour only made reference to the inference that might be drawn from them so far as Specsavers’ intention was concerned by way of observation or, perhaps, by way of confirmation of the view she had formed. Reference to those earlier offers is, however, not necessary in a case such as the present. It need not be doubted that in some circumstances earlier offers may, as a matter of fact, be relevant to the proper construction of an offer in question: see, for example, Henderson v Simon Engineering (Australia) Pty Ltd [1988] VR 867 at 872 (Murphy J); Duncan & Weller Pty Ltd v Mendelson [1989] VR 386 at 400–401 (Kaye J). But that is not the use to which the earlier offers on the face of it was made here. In any event, the September 2011 offer came almost a year after the October 2010 offer. There had been a deal of activity in relation to the proceeding in the meantime. The circumstances, therefore, that surrounded the making of the earlier offer or offers could hardly be considered relevant to the September 2011 offer.

45    Senior counsel for Specsavers also submitted that the September 2011 offer should have been construed by TOS (and by the primary judge and now by this Court) as including an offer to pay the costs on the second part of the proceeding concerning the assessment of damages on the undertaking or, if it did not, then an entitlement to its costs under R 25.12 on acceptance of the offer of $100,000 on account of those damages. However, as counsel for TOS submitted, one available interpretation of the offer is to read paras 1 and 4 of the offer together so as to indicate that the $100,000 offered in para 1 was inclusive of costs of the claim on the undertaking as to damages. Paragraph 4 by proposing that the proceeding “otherwise be dismissed” was apt to terminate any subsequent entitlement to costs under the Rules or deal with other remaining claims for relief. At the very least, by reason of these paragraphs of the offer, the position proposed as to costs of the second part of the proceeding lacked clarity.

46    While it may be doubted whether there was anything of substance remaining in the proceeding once the quantum of the damages had been assessed in relation to the undertaking, there were, at least theoretically, particular claims for relief that had been advanced in relation to the Tailor-made TVC which could have been pursued, although it does seem that by that time neither party treated that theoretical possibility as an actual possibility.

47    Be that as it may, the ambiguity about what the costs position on the second part of the proceeding would be, if the offer of compromise was accepted, was not removed by R 25.12.

48    In all of these circumstances, there was a relevant ambiguity in the terms of the September 2011 offer, as the primary judge found. The position in relation to the costs of the second part of the proceeding relevantly lacked clarity and so, in assessing whether the judgment ultimately obtained by way of assessment of damages on the undertaking was less favourable than the terms of the offer, her Honour was, with respect, right to conclude that she was not satisfied that the offer made was less favourable than the judgment obtained.

49    For these reasons, ground 2 of the notice of appeal must fail.

the effect of s 37m and s 37n of the fca act

50    The second ground of appeal pressed by Specsavers is ground 3, in which it is said that the primary judge erred:

(1)    in failing to give proper effect to s 37M and s 37N of the FCA Act;

(2)    in failing to give effect to her Honour’s findings that:

(a)    TOS treated the appellant’s offers with contempt;

(b)    as a result of TOS’s intransigence the parties were put to considerable expense and the proceedings were protracted; and

(3)    in failing to hold that TOS’s rejection of the September 2011 offer was unreasonable in circumstances where TOS failed to make any contemporaneous enquiry of the appellant as to the scope of the offer.

51    The essence of the ground pressed by Specsavers is that the primary judge should have awarded indemnity costs against TOS by reason of its failure to seek clarification of the ambiguity in the September 2011 offer (if it was ambiguous), this constituting a failure to comply with the duty imposed on the parties and their lawyers to achieve the overarching purpose of civil case management articulated by these provisions of the FCA Act.

52    Section 37M(1) defines the “overarching purpose” of civil practice and procedure in this Court as to “facilitate the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible”. Section 37M(2)(d) refers to the objective of “the disposal of all proceedings in a timely manner”, and, s 37M(2)(e) refers to the objective of “the resolution of disputes at a cost that is proportionate to the importance and complexity of the matters in dispute”.

53    Section 37M(3) provides that:

The civil practice and procedure provisions must be interpreted and applied, and any power conferred or duty imposed by them (including the power to make Rules of Court) must be exercised or carried out, in the way that best promotes the overarching purpose.

54    Section 37M(4) states the “civil practice and procedures provisions” referred to, so far as they apply in relation to civil proceedings, to be:

(a)     the Rules of Court made under this Act;

(b)     any other provision made by or under this Act or any other Act with respect to the practice and procedure of the Court.

55    By s 37N(1), the parties to a civil proceeding before the Court must conduct the proceeding (including negotiations for settlement of the dispute to which the proceeding relates) “in a way that is consistent with the overarching purpose”.

56    Further, by s 37N(2), a party’s lawyer must, in the conduct of a civil proceeding before the Court (including negotiations for settlement) on the party’s behalf “take account of the duty imposed on the party by subsection (1) and assist the party to comply with the duty”.

57    By s 37N(4), in exercising the discretion to award costs in a civil proceeding, the Court or a judge must take account of any failure to comply with the duty imposed by subs (1) or (2). The power, indeed duty, of the Court to regard the failure of a party or its lawyer to comply with the s 37N duties constitutes a powerful mechanism to encourage compliance with those duties.

58    Accordingly, by s 37N(4) the question of failure to comply with the duty imposed by s 37N(1) or (2), which duties have regard to the overarching purpose mentioned in s 37M, also take account of such objectives of disposing of a proceeding in a “timely manner” and whether the dispute was resolved at a cost that is “proportionate to the importance and complexity of the matters in dispute” as referred to in s 37M(2)(d) and (e).

59    In this instance, Specsavers in effect contends that if TOS considered the September 2011 offer of compromise to be ambiguous as to the costs position, if the offer were accepted, then it should have sought to clarify the terms of the offer and its failure to do so should result in the Court, in effect, treating R 25.14 as applying in this case.

60    It is difficult, however, to see why the duty to achieve the objectives of disposing of a proceeding in a timely manner or to resolve a dispute at a cost that is proportionate to the importance and complexity of a matter in dispute, for example, or any of the other particular objectives described in s 37M(2) or the broader overarching purpose described in s 37M(1), should mean that a party in receipt of an offer of compromise issued under the Rules is thereby subject to a positive obligation to clarify the terms of an offer made where it is ambiguous, for example, or, for that matter, to negotiate in respect of an unambiguous offer of settlement.

61    The purpose of an offer of compromise served under the Rules is directly tied to the Court’s power to award indemnity costs, with a view to encouraging parties to consider and not to reject out of hand reasonable offers made to bring a proceeding to an end. A party in receipt of an offer of compromise made under the Rules may choose to ignore the offer, but it does so at its own peril. There is no positive obligation to respond, save that the consequences of not accepting the reasonable offer may ultimately lead to an indemnity costs order being made against it.

62    In the circumstances of a case like the present, there is a further difficulty identified with the position advanced by Specsavers. It is not at all clear – and there is no evidence to this effect and nor would one expect there to be – exactly why TOS chose to ignore the September 2011 offer. While the primary judge, in respect of the question of costs payable up to the time the September 2011 offer was made, took the view that TOS treated Specsavers’ offers “with contempt” and chose not to dignify any of them with a response, it may well have been the case that, rather than TOS consider the September 2011 offer to have been ambiguous, it considered the offer of $100,000 on account of damages on the undertaking to have been woefully inadequate in light of the compensation claim it had advanced at that point of approximately $1.5 million.

63    To the extent that it might be thought that TOS in treating various offers of settlement, including the September 2011 offer of compromise, failed to meet the duties spelt out by s 37N, the primary judge appears, in any event, to have taken this into account when ordering that the costs of TOS on the assessment of damages after the offer of compromise should be paid on the same basis as before. The reasons for her Honour so finding are to be found first in what her Honour said, at [36], of her reasons for judgment, namely, that the offer made should not necessarily be ignored and may be taken into account in the exercise of the Court’s discretion, and secondly, at [39], where the primary judge expressly concluded, both in respect of the costs payable up to and after the time of the September 2011 offer, that costs should be reduced by 35% to reflect the considerations of:

    the judgment sum being less than $100,000;

    the likely costs being disproportionate to the true value of the claim; and

    TOS’s failure to respond to several overtures to settle the proceeding amount to failing to comply with the overarching purpose of civil practice and procedure under the FCA Act and Rules.

64    There is no appeal against the finding of the primary judge that the costs should be reduced on account of those factors, including the failure to comply with the overarching purpose of civil practice and procedure as set out in the FCA Act and Rules.

65    This is a case, therefore, where the primary judge in the exercise of the discretion to award costs under s 43(1) of the FCA Act, has taken into account relevant matters, including the overarching purpose described in s 37M and the duties imposed on a party and its lawyers under s 37N when ordering a percentage reduction of the costs recoverable in relation to a relevant part of the proceeding. There is nothing to indicate that the primary judge’s discretion in relation to the award of costs miscarried. In particular, there is no reason indicated, on the facts of this case, why the failure of TOS either to respond to or seek clarification of the September 2011 offer of compromise should have resulted in the primary judge awarding Specsavers indemnity costs from 9 September 2011. Her Honour’s exercise of the costs discretion was not plainly wrong nor affected by any error in the sense established by House v R (1936) 55 CLR 499 at 505.

66    For these reasons, ground 3 of the notice of appeal must fail.

Conclusion

67    For all of the above reasons, the appeal must be dismissed with costs. There will be orders accordingly.

Associate:

Dated:    14 December 2012