FEDERAL COURT OF AUSTRALIA

DSE (Holdings) Pty Limited v InterTAN Inc [2004] FCA 1251

DSE (HOLDINGS) PTY LTD v INTERTAN INC AND ANOR

N 3011 of 2002

ALLSOP J

22 SEPTEMBER 2004

SYDNEY

THE COURT ORDERS THAT:

1. THE COURT DECLARES THAT upon the proper construction of the written agreement entitled "Share Acquisition Agreement" and executed on 10 April 2001, the expression "December Accounts" means or refers to the document entitled: "Corporate Pack - Intertan Australia Subsidiary/Division for the period ending December 2000" and referred to by the parties in these proceedings as "the December Corporate Pack".

2. THE COURT ORDERS THAT judgment be entered in favour of the applicant against the first and second respondents in the sum of $4,208,602.06 inclusive of interest up to and including 22 September 2004.

3. THE COURT ORDERS THAT the first and second respondents pay to the applicant the sum referred to in order 2.

4. THE COURT ORDERS THAT the amended cross-claim be dismissed.

5. THE COURT DISCHARGES orders 3 and 4 made on 9 September 2004.

6. THE COURT ORDERS THAT the first and second respondents pay the applicants costs of the proceedings, including the costs of the amended cross-claim, any reserved costs and the costs of the third party discovery order made against SalomonSmithBarney on 19 December 2002 as agreed or taxed on an indemnity basis save that the costs of three days of hearing are to be paid as agreed or taxed on a party/party basis.

7. THE COURT ORDERS THAT the first and second respondents pay the third party’s costs and expenses of the discovery order made against SalomonSmithBarney on 19 December 2002.

8. If it be necessary, THE COURT ORDERS THAT time for the filing and service of a notice of appeal be extended to a day commencing today, 22 September 2004.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

1                     This is an application in relation to the making of final orders consequent upon my reasons published and orders otherwise made on 9 September 2004. Both parties request that I consolidate in today's orders, such orders as are in the nature of final orders that are outstanding. Therefore, in due course, when I pronounce the final orders, I will discharge some of the orders made on 9 September.

2                     The substantive dispute today rests on the issue of whether the applicant should have its costs at a higher level than party/party costs. Until sometime today, the only application made in that respect was a claim for indemnity costs from a time in March 2003, based on an offer that was made purportedly in accordance with Order 23 of the Federal Court Rules.

3                     Today, however, in argument, Mr Smith SC propounded a wider basis for that order for indemnity costs. Mr Studdy made no application for an adjournment and was otherwise able to deal with the argument. The only evidence led on the application was an affidavit of Ms Cox, of the applicant's solicitors, setting out the offer and covering letter from last year. Before I go to the substance of the matter, I should outline that evidence.

4                     On 11 March 2003, Clayton Utz, solicitors for the applicant, sent to Allens Arthur Robinson, solicitors for the respondents, a letter, which read as follows.

Enclosed by way of service is a Notice of Offer under Order 23 of the Federal Court Rules.

We trust that in considering this offer your clients will take into account the substantial burden they face if the offer is not accepted and the Applicant obtains judgment not less favourable that the terms of the offer. In this regard, we estimate that the Applicant’s costs of the proceedings will be in the vicinity of $1.5 million, a significant proportion of which has already been incurred.

The accompanying Notice of Offer read as follows.

1.      The Applicant accepts from the First and Second Respondents the sum of $3,6000,000.00 inclusive of costs in settlement of all causes of action pleaded against the First and Second Respondents in these proceedings.

2.      The payment referred to in paragraph 1 shall be made within 28 days after the acceptance of the offer.

3.      The offer is open for acceptance for 14 days beginning on the day after service of this Notice of Offer.

5                     On 28 March 2003, Allens Arthur Robinson sent, by way of facsimile, a reply, which read as follows.

We refer to your client’s Notice of Offer under Order 23 of the Federal Court Rules (the Offer).

As is apparent from the lapse of the 14 day period beginning the day after service of the Offer, it was not acceptable to our clients.

6                     That was, the evidence on the costs application. However, it was not put by anyone, as it could not be, that I should not have regard to the totality of the evidence in the case and of the conduct in the case from its inception being, as I was, the docket judge from the inception of the case.

7                     Mr Smith's submissions as to indemnity costs relied significantly upon the contents of paragraph 198 of my reasons for judgment. I do not repeat what I said there. That was a statement of knowledge of Mr Gingerich, in large part, derived from his cross-examination. Mr Smith's submissions were to the effect that if that was the respondents’ knowledge, as it was, it must have been available to the respondents if the case was conducted prudently, as it no doubt was, within a reasonable time after the commencement of the suit and, in those circumstances, to fight the case as it was fought, was in the words of Sheppard J in Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 at 233:

the fact that the proceedings were commenced or continued for some ulterior motive (Davies J in Ragata) or in wilful disregard of known facts or clearly established law (Woodward J in Fountain and French J in J-Corp); the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions (Davies J in Ragata); an imprudent refusal of an offer to compromise (eg Messiter v Hutchinson (1987) 10 NSWLR 525; Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 724 (Court of Appeal); Crisp v Kent (SC(NSW)(CA), 27 Sept 1993, unreported) and an award of costs on an indemnity basis against a contemnor (eg Megarry V-C in EMI Records).

[emphasis added]

8                     Mr Smith points to my reasoning in my judgment to the effect that not only would the contract case be lost but also the estoppel and rectification and misleading and deceptive conduct.

9                     Mr Studdy resists those submissions indicating or relying on the parts of my judgment in which I refer to the complexity of a matter, the difficulty of a matter, and the need to understand all the facts in the context. I will come back to that question, that is, the question of indemnity costs from the commencement, in a moment.

10                  As to the offer, I think there are difficulties with it as an offer under the rules. Order 23 rule 4 makes a difference between the permissive in sub-rule (1) and the mandatory in sub-rule (2). There was no specification here of the sum of interest. However, on the contract claim propounded by the applicant here, there was a contractual interest sum, which might be able to be seen not as interest for the purpose of sub-rule (2). However, the monetary claim under other heads, such as the damages recoverable under the Corporations Act 2001 (Cth) or other bases as pleaded, might be seen to contain a count or a claim for interest under section 51A of the Act.

11                  I do not propose to deal with the matter on the basis of Order 23. I think there is sufficient ground to conclude that Order 32 rule 4 (2) was not complied with. If I am wrong about that I can be corrected on appeal, but that is not to say that the offer was not relevant to considering the general discretion under s 43 of the Federal Court of Australia Act 1974 (Cth) and what might be called the Calderbank letter.

12                  There is authority collected by Finn J in GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 201 ALR 55 at 63, which would support the proposition that a so-called "all up" offer should not be considered in the same way as a Calderbank letter. See also Smallacombe v Lockyer Investment Co Pty Ltd (1993) 42 FCR 97; Hanave Pty Ltd v LFOT Pty Limited (Moore J, Federal Court, unreported, 11 November 1998)and Dr Martens Australia Pty Ltd v Figgins Holdings Pty Ltd [2000] FCA 602.

13                  I have considered those cases and to a significant extent, I think, they turn on what Spender J said in Smallacombe, which was not, as I understand his Honour, laying down a definitive rule that in an application for costs, an offer that was an all inclusive sum could not, in any circumstances, be taken into account by a Court in considering whether thereafter indemnity costs should be awarded.

14                  Section 43 of the Federal Court of Australia Act is a broad and ample power not to be read down otherwise than by judicial principle conformable with the amplitude of the power. That is not to say that I am seeking to depart from any of the costs principles identified in the cases referred to by Finn J. However, I think that one must look at the offer that was made in the totality of the context in which it was made.

15                  Thus, I think, at this point I need to move back to an expression of my views as to the whole position and within that context place the offer made in March. Before I do that, I wish to make a couple of comments about the judgment and reasons of 9 September that would not be able to be discerned were I not to express them.

16                  The hearing lasted some 12 to 13 days. It finished on 5 May. I gave my reasons on 9 September. That is, some four months after reserving. That length of time should be seen in the following context: I gave real consideration and was in a position to undertake an extempore judgment in this matter. The reason I did not was, if I may say without embarrassing him, the skill of Mr Macfarlan QC’s argument.

17                  My reasons were delayed for reasons connected with the press of other business of the Court, and the need to attend to other matters. After careful consideration of the submissions of Mr Macfarlan, which allowed me to write hopefully a clearer judgment than might have been had it been extempore, I came to the view that, in substance, the views I had at the end of the hearing were the views upon which I wished to base my judgment.

18                  The reason I make that clear is that by the end of the hearing, and having heard the evidence, in particular, of Mr Gingerich, as well, as Ms Fox and Mr Cox, I was left in little doubt as to the primary factual material in this case. The reference in paragraph 278 to what Lord Justice Steyn (as his Lordship then was) said in First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s Rep 194, was not a flourish or was not intended to be a flourish. The reasonable expectations of honest commercial parties are the foundation of a common law, are the foundation, leaving aside principles of prophylaxis, of equity and should be the foundation of how litigation is run between commercial parties.

19                  The courts are an arm of government to resolve disputes. Therefore, all citizens and all companies and commercial parties are, within the bounds of proper ethical conduct, entitled to fight their cases as they see fit. That does not mean, however, that how cases are fought is irrelevant to costs.

20                  When one understands the facts of this case, the reasonable expectations of honest people were as I have otherwise expressed them that if the respondents were correct in their assertions, the applicant had been misled. That is not an additional finding of any form of dishonesty or fraud. It is intended to reflect no more than I have said in my judgment.

21                  Every point was taken in this case. The respondents were entitled to take the points that they did. Trusted confidential advisers who gave the most careful consideration to the interests of the respondents contemporaneously in the transaction and who gave evidence on behalf of the respondents in the case with full access to their documentation did not produce their documents on discovery. It was necessary to institute third party discovery in these proceedings to extract the documents from SalomonSmithBarney.

22                  It is not unfair to say that where there was a point to be taken in this case it was taken; that is not a comment by way of criticism of any of the professional advisers or, in a sense, the client. I am not suggesting that any step taken in this litigation was taken improperly, however, the fact is that a 12 to 13 day case was fought to extract a fairly straightforward set of propositions which are recorded in large part in paragraph 198 of my reasons. They were, at the risk of over-simplification as follows. To the extent that anything I say here might be seen as in conflict with what I said in my judgment, it is not intended to be, but may only be a result of an extempore judgment here without benefit of close study of the reasons in recent days.

23                  The simplicity of the evidence ultimately formulated was as follows. The respondents through their very senior advisers and executives until five days before signing of the contract thought that the December accounts were the reference accounts. Everyone thought that. They had discussed it. They had discussed the question of US GAAP or Australian GAAP. They had met with the document in front of them. It was the December accounts when they were first asked for. It remained the December accounts through careful meetings of legal and financial advisers.

24                  One person came to the view five days before execution of the documentation of the significance of the withdrawal of DSE. For reasons that were not fraudulent he chose to remain silent: (a) he thought he was going to be pressed in negotiation again, (b) he thought he and his company had been pressed well hard enough or they were about to be and he knew that, and (c) he thought that the stand-alone accounts were in the data room and he thought the parties were big enough to look after themselves in the terms of this arrangement.

25                  He was horrified in September when he found the last matter not to be the case. I have dealt with that in my reasons. If that had been made plain in, not just the evidence, but in what the parties were prepared to exchange with each other by way of information as to how this case should be dealt with this would have been an entirely different case, in conduct, in preparation and in hearing.

26                  The respondents chose, and they must have chosen, not to outline with clarity Mr Gingerich's position. The affidavits of Mr Gingerich do not expose what must have been his basal instructions. The findings in paragraph 198 are not matters, which were tangential or difficult to expose. They lay at the heart of the case and always did, and the affidavits that were put on likely touch but do not grapple with those matters.

27                  Another fundamental question which is said by the respondents not to have come until late, that is until the opening of the case, was the understanding by the commercial parties of the importance of the December accounts. It may be that, in a sense and to a degree, the clarity of that was only made clear to me in terms of opening address. That is not a reflection on the parties, it is a reflection on me. When one listens, as in these sorts of cases one always must, to the intelligent, commercial person there was (and could have been) no doubt whatsoever in anyone's mind as to the role of the December accounts and that once the December accounts were used in the process of formulation of the contractual price they played an inexorable role in the post completion adjustment; cross-examination of all the witnesses made that plain.

28                  In those circumstances, with the understanding that Mr Gingerich had at all times as to what he knew about his own state of knowledge, about what he knew about Woolworths and DSE’s states of knowledge and about what he knew about the role of mutual communications in both parties understanding this case could have been dealt with in an entirely different way even if it be the case that the respondents wished to propound what might be said to be a technical answer to the case.

29                  When one takes account of the common understanding of the parties, in my view, though I would not say the contrary arguments were hopeless, I think as a matter of commercial intuition and as a matter of legal analysis the contractual argument of the applicant was strong if not compelling. However, equally compelling was the proposition that if as a matter of contract it was not right then the applicant was misled about a matter central to the operation of the contract, that is, the consideration. Those matters, in my view, must have been plain to the respondents. They took the view, as they were entitled to, to take every point and to run the case at all levels as hard as possible raising every conceivable argument that could legitimately be put on behalf of the respondent.

30                  As I said earlier, nothing I have said is intended as a criticism of practitioners involved but if that is the way commercial parties want to run their litigation they must understand that they might have to pay for it. This was a case for a claim where honest, commercial common sense made plain, it seems to me, that the applicant in some fashion should succeed.

31                  It is in that context that the offer of 11 March was made. True it is that the evidence was not on but by that stage there was ample opportunity to obtain the instructions of Mr Gingerich which I have no doubt reflected his honest and candid evidence from the witness box. The offer, though masking the amount of interest and the amount of costs, to a sophisticated firm of solicitors advising sophisticated commercial parties was plainly not an immaterial reduction on the full recovery. It was $3.6 million inclusive of costs and interest. The parties knew what the primary claim was. The parties knew what the primary interest rate was and at that point the primary claim in full on the contract was $3.9 million or thereabouts plus costs.

32                  Assuming costs as a constant variable one can identify the approximate amount of the deduction of the full amount of the claim. If costs were $100,000 it was $3.9 million plus $100,000 which is $4 million compared to $3.6 million. If costs were $500,000 it was $4.4 million compared to $3.6 million. Experienced solicitors in the position of the respondents’ solicitors would have understood what their costs were and what an approximate amount of party/party costs at that point would have been. The offer was rejected.

33                  Section 43 of the Act is informed by the principles to which Finn J referred in GEC Marconi but it is also a broad discretion. Each case must be looked at on its own facts. This case was not prepared, was not developed at an interlocutory level, was not fought on the basis of the facts that were plain from Mr Gingerich's cross-examination. If they had been, as I said earlier, this would have been a different case in preparation and a different case in hearing.

34                  The fact that the case was a 12 to 13 day case and involved much of the discovery, arguments about privilege and the like, rests in significant part on the failure to disclose and lay open frankly Mr Gingerich's state of mind. This is not a Court of the utmost good faith but, at the same time, the clarity and illumination of Mr Gingerich's state of mind would have done an enormous amount to reduce the costs burden and the time burden of both the parties, their advisers and the Court.

35                  Mr Studdy has provided me with a helpful written outline of submissions, six pages, which will remain in the file. I do not propose to deal with all the submissions in terms that he makes but I reject the proposition that in the particular exercise of the judicial discretion in section 43, I must find conduct characterised and only characterised by words used by other judges in other cases. There needs to be a reason why the ordinary rule of party/party costs should not apply and I refer to what was said by Cooper and Merkel JJ in Re Wilcox; Ex parte Venture Industries Pty Ltd (No 2) (1996) 72 FCR 151 at 156 -7 referred to by Finn J in GEC Marconi at 63:

(a)   the court ought not to depart from the rule that costs be ordered on a party and party basis unless the circumstances of the case warrant the court in departing from the usual course;

(b)   the circumstances which may warrant departure from the usual course arise as and when the justice of the case so requires or where there may be some special or unusual feature in the case to justify the court in departing from the usual course;

(c)    while the circumstances in cases in which indemnity costs have been ordered offer a guide, the question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for costs other than on a party and party basis.

36                  However, in modern day commercial litigation if parties choose to have, at huge expense, a case prepared and run where the issues as propounded by both parties go to state of mind, common understanding and how that arose in a commercial body of behaviour at which both parties were present and does not in those circumstances bring forward reasonably frankly the determinative or likely determinative evidence of one of its senior executives when that information must have plainly been in its possession for many, many months, if not from shortly after commencement of the suit, and an applicant, to collect its debt under a contract and a working commercial provision must bring a case to court for 12 days, with two interlocutory arguments about privilege (going to state of mind), with an interlocutory argument about a third party discovery, with extensive preparation of written statements then in those circumstances, in my view, the party that has had the fruits of its victory in terms of judgment and who has made a bona fide and reasonably clear offer at least identifying with clarity some real concession should not be placed in a position of receiving only its party/party costs.

37                  I have not used the language of “reasonableness” or “imprudence”. If it were necessary to do so then one could compress my reasons into that language, however, I would prefer to express my views on a broader level that if people want to fight trench warfare in commercial litigation and if people want to fight a case about rectification and common understanding and construction of contracts and not lay out reasonably frankly the evidence that is central to that then they should pay the full costs of a 12 day trial.

38                  The qualification that I would bring to that is that I am not persuaded that there was or may not be a reasonable case to bring on a hypothesis of bringing forward Mr Gingerich's evidence but relying upon what might otherwise be said to be by others a technical answer to some of the claims’ construction suit, the provisions in the contract, in effect, barring estoppels and misleading or deceptive conduct.

39                  It is difficult to see how they would meet Taylor v Johnson (1983) 151 CLR 422 but it might be said that Taylor v Johnson could rationally be resisted on the basis of the character and nature of the parties. It is difficult without creating further difficulties to incorporate that reservation in what I think is a fair costs order in this case. I have not been addressed by the parties on this basis. However, the parties have approached the matter at a level and in a manner conformable with the width of the discretion in section 43 and I think in all the circumstances some form of order should be made to reflect how this case was conducted.

40                  The orders that I propose to make in relation to costs are, in a sense, in the alternative by which I mean that if I am held to be wrong in one it should be noted I would make the other. The first order I would make would be that the respondents pay the costs of the applicant on an indemnity basis with the exception that the costs should only be paid on a party/party basis for three days of hearing. That identification of three days of hearing is intended to be sufficient to incorporate a body of preparation conformable with presentation of the case based on Mr Gingerich's instructions because I think the case would probably have taken less than that.

41                  If I be wrong about that, though it had its difficulties under order 23 rule 4, I think in the context of how the case had been run to date to that point and in the context of the totality of the case, that is before and after, it is only just and fair that the applicant should have its costs on an indemnity basis from 25 March 2003.

42                  Before I do make the orders and I know I have said it twice, but I want to make it pellucid; it is not either a personal criticism of the practitioners or, in a sense, a criticism of the corporations’ conduct, that is, it is not a species of sharp practice but what underlies my reasons is that if people wish to engage, as I said, in trench warfare then there is a price to be paid for it.

43                  The orders of the Court are as follows:

1. THE COURT DECLARES THAT upon the proper construction of the written agreement entitled "Share Acquisition Agreement" and executed on 10 April 2001, the expression "December Accounts" means or refers to the document entitled: "Corporate Pack - Intertan Australia Subsidiary/Division for the period ending December 2000" and referred to by the parties in these proceedings as "the December Corporate Pack".

2. THE COURT ORDERS THAT judgment be entered in favour of the applicant against the first and second respondents in the sum of $4,208,602.06 inclusive of interest up to and including 22 September 2004.

3. THE COURT ORDERS THAT the first and second respondents pay to the applicant the sum referred to in order 2.

4. THE COURT ORDERS THAT the amended cross-claim be dismissed.

5. THE COURT DISCHARGES orders 3 and 4 made on 9 September 2004.

6. THE COURT ORDERS THAT the first and second respondents pay the applicants costs of the proceedings, including the costs of the amended cross-claim, any reserved costs and the costs of the third party discovery order made against SalomonSmithBarney on 19 December 2002 as agreed or taxed on an indemnity basis save that the costs of three days of hearing are to be paid as agreed or taxed on a party/party basis.

7. THE COURT ORDERS THAT the first and second respondents pay the third party’s costs and expenses of the discovery order made against SalomonSmithBarney on 19 December 2002.

8. If it be necessary, THE COURT ORDERS THAT time for the filing and service of a notice of appeal be extended to a day commencing today, 22 September 2004.

Associate:

Dated: 25 October 2004