FEDERAL COURT OF AUSTRALIA

Sydney Refractive Surgery Centre Pty Ltd v Commissioner of Taxation [2007] FCA 1544

COURTS AND JUDGES –reasonable apprehension of bias – whether criticisms of a litigant in a previous decision are a basis for disqualification in separate proceedings

Income Tax Assessment Act 1997 (Cth)

Ebner v Official Trustee (2000) 205 CLR 337

Johnson v Johnson (2000) 201 CLR 488

Re JRL; Ex parte CJL (1986) 161 CLR 342

Seven Network Ltd v News Ltd [2007] FCA 1062

Sydney Refractive Surgery Centre Pty Ltd v Commissioner of Taxation

NSD 2471 OF 2006

SACKVILLE J

9 OCTOBER 2007

SYDNEY

THE COURT ORDERS THAT:

1.                  The application to disqualify Sackville J from hearing and determining the appeal be dismissed.

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

REASONS FOR JUDGMENT

1                     On 18 September 2007, I made orders vacating the hearing in these proceedings, which had been set down for 20 September 2007.  In the course of the interlocutory hearing on that day, Mr Smark, who appeared with Ms McBride for the applicant (‘SRSC’), asked me to ‘recuse’ myself as the trial Judge.  After hearing Mr Smark, I declined to accede to the request.  I indicated that I would provide brief reasons for my decision in due course.  These are the reasons.

BACKGROUND

A Tax Liability

2                     SRSC commenced proceedings in August 1998 in the Supreme Court of New South Wales, claiming damages in respect of a defamatory television broadcast.  The defendants in the defamation proceedings included HSV Channel 7 Pty Ltd and Amalgamated Television Services Pty Ltd (together ‘Channel 7’).

3                     On 18 March 2004, Studdert J awarded SRSC damages totalling $844,624 in the defamation proceedings.  His Honour reserved leave to SRSC to apply for additional damages if it was liable to include in its assessable income a net capital gain pursuant to the relevant provisions of the Income Tax Assessment Act 1997 (Cth).  It appears that SRSC received the sum of $844,624 from Channel 7 during the taxation year ended 30 June 2004.

4                     In September 2004, SRSC, presumably at the request of Channel 7, applied to the respondent in the present proceedings (‘Commissioner’) for a private binding ruling, pursuant to which SRSC would be entitled to disregard the damages received by it when returning its assessable income for the year ended 30 June 2004.  The Commissioner declined to make such a ruling. 

5                     SRSC then lodged a tax return for the year ended 30 June 2004 which included in its assessable income the bulk of the amount it received by way of damages as a capital gain.  This resulted in SRSC incurring a tax liability for the year of $244,449.90 in respect of the capital gain.

6                     SRSC subsequently objected to the assessment.  The Commissioner disallowed the objection.  By application dated 18 December 2006, SRSC appealed to the Federal Court against the Commissioner’s objection decision.  The matter was allocated to my docket in the usual way.  I refer to the matter as the ‘taxation proceedings’.

C7 Case

7                     I have been responsible for the conduct of long-running and complex litigation known as the ‘C7 Case’.  The applicants in the C7 Case are Seven Network Ltd and C7 Pty Ltd (together ‘Seven’).  Although I have not been told of the precise relationship between Channel 7 and Seven, I assume the corporations are related.

8                     I held directions hearings in the taxation proceedings on 8 February 2007 and 24 May 2007.  No reference was made by either party at those directions hearings to my role in the C7 Case, in which I had reserved judgment on 5 October 2006.

9                     A further directions hearing in the taxation proceedings was held on 26 July 2007.  At that time, the C7 Case had been listed for judgment the following day, 27 July 2007.

10                  I enquired of Ms McBride, who appeared on 26 July 2007 for SRSC in the taxation proceedings, whether Seven was effectively a party to the proceedings or had an interest in it.  Ms McBride informed me that Seven had indemnified the taxation proceedings.  I then asked whether Seven was giving instructions in the proceedings ‘because it may [make a] difference [as] to who actually hears the case’.  I was told that Seven was behind the litigation.

11                  The following exchange then took place:

‘HIS HONOUR:          Thank you.  Are there any factual issues?

MS McBRIDE:            We have put on all our evidence.

HIS HONOUR:           But are there any disputed factual issues is what I want to know.

MS McBRIDE:            No, your Honour.  There are no dispute of factual - - -

HIS HONOUR:           It’s purely a question of law?

MC McBRIDE:            It’s a question of law, your Honour, yes.

                                    …

MS McBRIDE:            The only issue that may cause the Court to have – to spend more time on it is a market valuation issue to do with [the] cost base of the asset.

HIS HONOUR:           Well, is there a dispute about that?  Evidentiary dispute?

MS McBRIDE:            I believe it can be argued as a matter of law without there being a question of evidence.

HIS HONOUR:           Well, at the moment what I am interested in is whether there is going to be cross-examination of any witness, for example.

MS McBRIDE:            We believe there will be no cross-examination of any witness.’

12                  I made directions which, among other things, provided for the hearing in the taxation proceedings to take place on a date to be notified to the parties.  The parties were notified shortly after the directions hearing that the hearing would take place before me on 20 September 2007, that being a date convenient to both parties.

13                  On 27 July 2007, I delivered judgment in the C7 Case: Seven Network Ltd v News Ltd [2007] FCA 1062 (‘C7 Judgment’).  In the C7 Judgment, I indicated that I would dismiss Seven’s application.  I also made findings of fact adverse to the credit of some of Seven’s witnesses and made certain criticisms of Seven for the manner in which it had conducted the proceedings.  Adverse factual findings and criticisms of the manner in which the case had been conducted were not confined to Seven.

Correspondence

14                  On 29 August 2007, over a month after the directions hearing in the taxation proceedings, my associate received a letter from solicitors who stated that they were acting for SRSC on instructions from Channel 7.  The letter asked me to disqualify myself from hearing the taxation proceedings.  The substance of the letter was as follows:

‘[I]n the course of finding wholly against Seven’s case [in the C7 Case], his Honour:

(a)       was highly critical of the duration, complexity and expense of the proceedings, and of the conduct of the proceedings by Seven;

(b)       reflected, at some length, upon any prospective appeal by Seven against his Honour’s judgment;

(c)        made strongly adverse findings against certain of Seven’s witnesses, including Mr Stokes.

Seven accepts that the third of these matters is not, standing alone, of any great significance in relation to his Honour’s hearing of the present proceedings.

However, the first two matters remain of concern to Seven in relation to the present proceedings.  As to the first, at [58]-[61] of the summary, and [67]-[74] of the main judgment, his Honour reflected upon the possibility of an appeal by Seven.  That reflection produced a public response by Seven which apparently led to the issue of a statement on 3 August 2007 by the Director, Public Information, Federal Court of Australia.  A fair-minded bystander would infer that his Honour had some role to play in the issuing of that statement.

As to the second matter, his Honour’s criticism of Seven’s conduct of the C7 case was very strong (see at paragraphs [2]-[1], [27]-[29], [36]-[37] of the summary of the case and the amplifications of those comments in the body of the C7 judgment).  Again, the matter did not stop with the reasons for judgment: at the Supreme Court of New South Wales Annual Conference, his Honour delivered a paper entitled “Mega-Litigation: Towards a new approach”, in which the C7 litigation featured heavily, and in which his Honour implicitly revisited some of his criticisms of Seven: see at [5], [16], [18], [26].

The final orders in the C7 case, including as to costs, have not yet been made and the submission process in relation to the matters will still be on foot by the time of the hearing in the present proceedings.

Seven accepts of course, that in the C7 case, his Honour was critical of parties and witnesses other than those associated with Seven.  However, it is Seven’s contention that against the background of all these matters, a fair-minded lay observer might reasonably apprehend that his Honour might not bring an impartial and unprejudiced mind to the resolution of the questions in the present proceedings, so soon after the C7 case’.

15                  On 11 September 2007, I caused a letter to be sent to Channel 7’s solicitors in the following terms:

‘Your letter raises two matters.  Without making any final determination on [Channel 7’s] foreshadowed application, his Honour wishes to draw your attention to the following:

1.         The first matter of concern to [Channel 7] raised in your letter relates to what are said to be reflections in the C7 judgment on the “possibility of an appeal by Seven”.  It is not clear whether the concern is the substance of the comments made in the Judgment (including the Summary) or what is said to be the issue of a statement on 3 August 2007 by the Court's Director, Public Information, or both.

            If the former, his Honour notes that the comments in the Judgment and Summary were expressly directed to “the parties” and pointed out the benefits of the parties resolving any appeal by mutual agreement.

            If the latter, your letter appears to assume that the Court was prompted to issue a statement in response to public comments apparently made by or on behalf of Seven.  The assumption is incorrect. Neither his Honour nor the Court has made, or intends to make, any response to comments that may have been made by or on behalf of Seven in relation to the Judgment.

            The Director, Public Information, sent a letter in identical terms to the Editor of each of The Australian and the Australian Financial Review.  The sending of the letters was not prompted by any public statement by Seven, but by the fact that both newspapers had published inaccurate reports, quite independently of any reference to comments made by or on behalf of Seven, to the effect that his Honour had urged Seven not to appeal.  The letters were sent following consultations between his Honour and the Chief Justice and their terms were settled by the Chief Justice.  One letter, in slightly edited form, was published.  The other was not.

2.         As to the second matter, his Honour notes that the particular paragraphs of the Summary identified in your letter seem to relate to the cost of the litigation and to certain findings of fact.  In these respects, the Judgment speaks for itself.  The paper to which your letter refers appears to carry the matter no further.

            It is not entirely clear why, if (as you accept) adverse findings of fact made in the C7 Case are of no great significance to entirely separate proceedings, comments made in the C7 Case about the conduct of that case are of significance to the separate proceedings. According to the applicant’s counsel, the current appeal involves purely a question of law, and presumably gives rise to no procedural complexities.

In the circumstances, his Honour considers that the appropriate course is that any application you wish to make on behalf of your client should be dealt with in open court. 

Any such application can be made at the commencement of the hearing on 20 September 2007. At that time, the respondent will also have the opportunity to make known its views on the issue, should it wish to do so.

If you wish to file and serve written submissions in support of any application in advance of the hearing, you may do so, but his Honour does not propose to make any direction in this regard’.

The Application

16                  As I have recorded, Mr Smark invited me to deal with the disqualification application at the interlocutory hearing in the taxation proceedings on 18 September 2007 which, at the parties’ request, had been listed at short notice.  I indicated to Mr Smark that I was content to follow the course he suggested.

17                  Mr Smark did not file any written submissions, but made brief oral submissions on behalf of Channel 7 in support of the disqualification application.  I should record that Mr Smark advanced the oral submissions in the interests of his client in an entirely appropriate manner.  The Commissioner made no submissions in relation to the application.

18                  Mr Smark accepted that, in view of the contents of the letter of 11 September 2007, the publication in the Australian Financial Review of the letter from the Court’s Director of Public Information took on ‘a very subsidiary role in [the disqualification] application’.

19                  Mr Smark confirmed that the taxation proceedings would not involve any questions of credit and that there would be no dispute as to primary facts.  However, he submitted that because of the criticisms made of Seven in the C7 Judgment, a hypothetical reasonable observer would harbour a concern that I would be ‘annoyed at Channel 7’ and that this might cause me to prejudge the issues in the taxation proceedings.

REASONING

20                  The test for determining whether a judge is disqualified by reason of the appearance of bias was authoritatively stated by the High Court in Johnson v Johnson (2000) 201 CLR 488, at [11]:

‘the test to be applied in Australia in determining whether a judge is disqualified by reason of the appearance of bias (which, in the present case, was said to take the form of prejudgment) is whether a fair-minded lay observer might reasonably apprehend that the judge might not bring an impartial and unprejudiced mind to the resolution of the question the judge is required to decide.’  (Emphasis added.)

As the Court noted (at [12]), that this test has been adopted in preference to the less stringent test applied in England:

‘… for the reason that it gives due recognition to the fundamental principle that justice must both be done, and be seen to be done.  It is based upon the need for public confidence in the administration of justice.  “If fair-minded people reasonably apprehend or suspect that the tribunal has prejudged the case, they cannot have confidence in the decision”.  The hypothetical reasonable observer of the judge’s conduct is postulated in order to emphasise that the test is objective, is founded in the need for public confidence in the judiciary, and is not based purely upon the assessment by some judges of the capacity or performance of their colleagues.  At the same time, two things need to be remembered: the observer is taken to be reasonable; and the person being observed is “a professional judge whose training, tradition and oath or affirmation require [the judge] to discard the irrelevant, the immaterial and the prejudicial”’.  (Citations omitted.)

21                  It is also necessary to bear in mind the observations of Mason J in Re JRL; Ex parte CJL (1986) 161 CLR 342, at 352:

‘It seems that the acceptance by this Court of the test of reasonable apprehension of bias … has led to an increase in the frequency of applications by litigants that judicial officers should disqualify themselves from sitting in particular cases on account of their participation in other proceedings involving one of the litigants or on account of conduct during the litigation.  It needs to be said loudly and clearly that the ground of disqualification is a reasonable apprehension that the judicial officer will not decide the case impartially or without prejudice, rather than that he will decide the case adversely to one party.  There may be many situations in which previous decisions of a judicial officer on issues of fact and law may generate an expectation that he is likely to decide issues in a particular case adversely to one of the parties.  But this does not mean either that he will approach the issues in that case otherwise than with an impartial and unprejudiced mind in the sense in which that expression is used in the authorities or that his previous decisions provide an acceptable basis for inferring that there is a reasonable apprehension that he will approach the issues in this way.  In cases of this kind, disqualification is only made out by showing that there is a reasonable apprehension of bias by reason or prejudgment and this must be “firmly established”. 

…

Although it is important that justice must be seen to be done, it is equally important that judicial officers discharge their duty to sit and do not, by acceding too readily to suggestions of appearance of bias, encourage parties to believe that by seeking the disqualification of a judge, they will have their case tried by someone thought to be more likely to decide the case in their favour’.

See also Ebner v Official Trustee (2000) 205 CLR 337, at [6]-[9], per Gleeson CJ, McHugh, Gummow and Hayne JJ.

22                  It is true that in the C7 Judgment I found against Seven on all the causes of action upon which it relied.  I also criticised the manner in which Seven presented important aspects of its case and expressed disapproval of what I regarded as the disproportionately large amount of costs incurred by the parties although, as I have noted, my criticisms were by no means confined to Seven.

23                  A fair-minded observer, however, in considering whether there is a reasonable apprehension that I might bring an impartial and unprejudiced mind to the resolution of the particular questions that arise in the taxation proceedings, would take into account a number of factors.  These include the following:

·                    The issues in the taxation proceedings essentially involve questions of law relating to the liability of SRSC to capital gains tax in respect of the award of damages to it in the defamations proceedings.  There is no dispute as to the primary facts and no issues as to credit arise.  (As Mr Smark pointed out, if there were any issues of credit, they would not involve officers of Channel 7.)  Channel 7 accepts that the adverse findings as to the credit of certain officers of Seven made in the C7 Judgment are of no great significance in assessing whether there is a reasonable apprehension of bias in the taxation proceedings.

·                    The legal issues (and the factual issues, if any) in the taxation proceedings have no relationship whatsoever to those addressed in the C7 Case.  If it matters, there is no suggestion of any procedural problems or costs issues in the taxation proceedings of the kind that attracted attention in the C7 Judgment.  None of the conclusions reached in the C7 Judgment, or opinions expressed, has any relevance to the issues that arise in the taxation proceedings.  There is no basis for a reasonable observer to conclude from the reasoning in the C7 Judgment that I would be likely to prefer one view of the law (or facts) over another in the taxation proceedings.

·                    As I understood Mr Smark, the only substantial basis for suggesting that there would be a reasonable apprehension of bias in the taxation proceedings, is that what was said to be my ‘annoyance’ at Seven’s conduct of the C7 Case would detract from the necessary appearance of impartiality and want of prejudice.  I doubt that a fair-minded observer would read the C7 Judgment as exhibiting judicial ‘annoyance’ at Seven, as distinct from understanding the judgment to record the considered views of a trial Judge, even if strongly expressed at times, on matters of importance arising from the manner in which the proceedings were conducted.  In any event, the hypothetical fair-minded observer would regard it as significant that any ‘annoyance’ had been expressed in a judgment delivered in an entirely separate case.  The suggestion advanced by Mr Smark also seems to me to overlook the fact that the hypothetical fair-minded observer would recognise that the decision-maker is a:

                        ‘professional judge whose training, tradition and oath or affirmation require [the judge] to discard the irrelevant, the immaterial and the prejudicial’.

                        Such a judge would be taken by a fair-minded observer to be perfectly capable of ensuring that any criticisms of Seven in the C7 Case did not influence his judgment in the taxation proceedings.

24                  In my view, the test for determining whether there is a reasonable apprehension of bias in the present case has not been satisfied.  None of the matters raised by Channel 7 seems to me sufficient to lead a fair-minded lay observer reasonably to apprehend that I might not bring an impartial and unprejudiced mind to the resolution of the particular questions presented by the taxation proceedings. 

25                  It was for these reasons that I declined the application to disqualify myself.

Associate:

Dated:         9 October 2007