FEDERAL COURT OF AUSTRALIA

Inform Design and Construction Pty Ltd v Boutique Homes Melbourne Pty Ltd (No 2) [2008] FCA 965

PRACTICE AND PROCEDURE – costs – circumstances in which indemnity costs will be ordered – Calderbank letter – whether indemnity costs should be ordered when respondent makes offer to settle if paid proportion of costs incurred

Federal Court of Australia Act 1976 (Cth), s 43

Federal Court Rules 1979 (Cth), O 62

Copyright Act 1968 (Cth)

Re Wilcox; Ex parte Venture Industries Pty Ltd (No 2) (1996) 72 FCR 151 cited

Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 considered

Davids Holdings Pty Ltd v Coles Myer Ltd (1995) ATPR 41-383 cited

Ogawa v Spender (2006) 151 FCR 228 cited

Barrett Property Group Pty Ltd v Metricon Homes Pty Ltd (2007) 74 IPR 52 referred to

Dresna Pty Ltd v Linknarf Management Services Pty Ltd (in liq) (No 2) [2006] FCA 755 cited

Black v Lipovac (by his next friend Lipovac) (1998) 217 ALR 386 cited

Alpine Hardwoods (Aust) Pty Ltd v Hardys Pty Ltd (No 2) (2002) 190 ALR 121 cited

INFORM DESIGN AND CONSTRUCTION PTY LTD (ACN 058 414 592) v BOUTIQUE HOMES MELBOURNE PTY LTD (ACN 081 136 281)

VID 681 OF 2006

WEINBERG J

25 JUNE 2008

MELBOURNE

THE COURT ORDERS THAT:

1.                  The respondent’s application for indemnity costs be dismissed.

2.                  The respondent pay the costs of and incidental to that application.

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

REASONS FOR JUDGMENT

1                     When I delivered reasons for judgment in this matter on 18 June 2008, I ordered that the application be dismissed with costs. I had in mind that those costs would be assessed on a party and party basis.

2                     Subsequently, the respondent intimated that it wished to be heard in support of an application that costs be paid on an indemnity basis, either from the date of the commencement of the proceeding or, alternatively, from a date shortly after it sent what it regarded as a Calderbank letter.

3                     In pursuing its application for indemnity costs, the respondent relies upon two grounds:

(a)        that the applicant, properly advised, should have known all along that its case was hopeless; and

(b)        that the applicant unreasonably refused an offer by the respondent, contained in a letter dated 17 August 2007, to compromise the proceeding.

4                     The applicant accepts that costs must follow the event in this case.  However, it opposes any order that such costs be paid on an indemnity basis. 

5                     The principles that govern the award of costs in this Court are well settled.  Section 43(2) of the Federal Court of Australia Act 1976 (Cth) confers upon the Court a wide discretion which must, however, be exercised judicially: Re Wilcox; Ex parte Venture Industries Pty Ltd (No 2) (1996) 72 FCR 151 at 152 per Black CJ.  Detailed provisions in relation to costs are to be found in Order 62 of the Federal Court Rules.These are predicated upon the assumption that costs orders will normally be on a party and party basis.  However, it is clear that the Court has a discretion under s 43 in appropriate cases to award costs on some other basis. 

6                     There is a useful discussion by Sheppard J of the principles under which indemnity costs can be ordered in Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225.  There should be present some special or unusual feature in the case to justify a departure from the usual order that costs be paid on a party and party basis.  Sheppard J set out some examples of such features.  They included the bringing of proceedings in wilful disregard of known facts or clearly established law, the making of allegations that ought never to have been made, and an imprudent refusal of an order to compromise.  Nonetheless, it must be remembered that each case has to be considered in the light of its own particular facts and care must be taken not to circumscribe the broad discretion as to costs by reference to closed categories. 

7                     Indemnity costs have been awarded on the basis of actions and/or defences maintained without a proper foundation.  See, for example, Davids Holdings Pty Ltd v Coles Myer Ltd (1995) ATPR 41-383 and Ogawa v Spender (2006) 151 FCR 228. 

8                     It was submitted on behalf of the respondent that there were a number of special features that warranted an award of indemnity costs in its favour.  The applicant’s claim was essentially based on breaches of the Copyright Act 1968 (Cth).  It claimed that the respondent, by the design and construction of the Villa View home, substantially reproduced and thereby infringed its copyright in the designs of two of its project homes, the Urban and the Seasons. 

9                     By letter dated 18 April 2006, written in response to the applicant’s letter of demand dated 28 March 2006, the respondent denied having infringed the applicant’s copyright.  In particular, the respondent claimed that the Villa View had been designed through the evolution of a number of plans created by the respondent, which were made without reference to the applicant’s plans.  These included the respondent’s First Villa Grand and Second Villa Grand.  Copies of these earlier plans were attached to the respondent’s letter as were copies of hand-drawn sketches showing how the Villa View plan had evolved from these earlier designs.  That was the defence relied upon by the respondent in the trial of this proceeding.   It was the defence upon which the respondent eventually succeeded.

10                  According to the respondent, despite it having even at that stage provided solid evidence of the independent creation of the Villa View design, the applicant persisted with its claims and issued the proceeding in this Court. 

11                  By letter dated 26 June 2006, the respondent reiterated that it had created the Villa View design independently and without reference to any of the applicant’s designs.  Further detail was provided as to how the Villa View had evolved from earlier designs that had been created by the respondent.  In this letter, the respondent advised the applicant that it considered the applicant’s case to be misconceived and hopeless and warned the applicant that, if successful in the proceeding, it would seek an order for indemnity costs. 

12                  The respondent submitted that even if it could not be said that the applicant had behaved unreasonably in commencing the proceeding, it should not have continued with the litigation once discovery had been given.  On 30 August 2006 the respondent filed a list of documents, which made it clear that the Villa View had been based on previous designs and had been created independently.  According to the respondent, the discovered documents included a number of plans, all of which showed a clear design progression leading from what were described as the Mawson Lakes plans through to the Villa Grand and ultimately the Villa View.  The respondent submitted that, at least by that stage, the applicant should have recognised that it had no viable claim for breach of copyright.  The applicant had no evidence of copying, conscious or otherwise, and could only hope to build a case based on cross-examination of the respondent’s witnesses.  Such a case could only be described as speculative. 

13                  According to the respondent, even that slim hope must have dissipated once the respondent’s evidence was filed on 15 May 2007.  This set out clearly on oath the evidence of the three key individuals associated with the design of the Villa View, namely, Mr Di Natale, Mr de Weerd, and Mr Lazarovski.  They each swore that the Villa View was based on changes made to earlier plans designed by the respondent over an extended period.  They denied having seen, or having been aware of, any of the applicant’s plans, or having inspected any of its homes: cf Barrett Property Group Pty Ltd v Metricon Homes Pty Ltd (2007) 74 IPR 52.

14                  The respondent submitted that by that point it should have been obvious to the applicant and its advisers that its case could only succeed on the basis of subconscious copying and that this depended upon establishing sufficient points of similarity between the parties’ plans to enable that inference to be drawn.  However, such a case would be difficult to mount in the face of a credible and convincing explanation, supported by a clear documentary trail, of how the Villa View had independently evolved from the respondent’s own earlier plans.

15                  Finally, the respondent relied upon what it described as a Calderbank letter dated 17 August 2007.  The purpose of such a letter is, of course, to encourage the recipient to consider carefully the consequences of proceeding further with the litigation.  The party seeking a special costs order must show that the rejection of the offer that the letter contained was so unreasonable that the usual order should not be made. 

16                  The letter of 17 August 2007 outlined the matters referred to above, as well as some additional matters, and warned the applicant that it would seek indemnity costs at the conclusion of the proceeding if, as it anticipated, the applicant failed.  It warned the applicant that there was no basis upon which the respondent’s case of independent creation could properly be challenged.  It offered to accept the sum of $35,000 as partial recompense for what it asserted were the actual costs incurred to that date.  The offer was open for seven days.  It was not accepted. 

17                  The applicant disputed the respondent’s contention that its case was always built on speculation and ought to have been seen as having no chance of success.  It submitted that it was all very well to view matters in this way with the benefit of hindsight.  In counsel’s own words:

“A predicted outcome being borne out by the subsequent events, viewed retrospectively, is apt to seem inevitable when in reality it was not – or, at least, it was not unreasonable to consider it otherwise.”

18                  The applicant accepted that its case had been based on inference.  It had relied upon the unusual level of publicity that its homes had generated as the basis for an inference that the respondent had access to at least its broad designs, if not its detailed plans.  That would then allow for the inference of subconscious copying, a recognised and legitimate head of copyright infringement. 

19                  According to the applicant, the respondent’s pre-trial denials of knowledge of the applicant’s designs, and its denials of deliberate use of those designs, while ultimately accepted by the Court, were not necessarily determinative.  The respondent might have been found to have infringed the applicant’s copyright unwittingly.  That was the point of the allegation of subconscious copying. 

20                  Put simply, the applicant submitted that although it had been unsuccessful, it could not be said that its claim was doomed to fail or that it was so unreasonably maintained as to warrant a departure from the usual rule as to costs.  In that regard, the applicant noted that, under cross-examination, its independent expert, Mr Wines, had resiled significantly from the evidence that he gave in chief.  This could not reasonably have been anticipated and, according to the applicant, represented one of the ordinary vicissitudes of litigation.  It goes without saying that the trial of any proceeding involves risks of this kind. 

21                  The applicant referred to Dresna Pty Ltd v Linknarf Management Services Pty Ltd (in liq) (No 2) [2006] FCA 755, where I said at [18] that the Court should not readily be persuaded that a case had no chance of success.  The case in question had failed and, with hindsight, it might well have been anticipated that this was precisely what would occur.  Nonetheless, there were some imponderables. 

22                  With regard to the Calderbank letter, the applicant submitted that the making of such an offer, and its rejection, did not of itself justify a special order for costs.  To justify such an order, the respondent bore the onus of establishing that the rejection of the offer was “imprudent” or “plainly unreasonable”: Black v Lipovac (by his next friend Lipovac) (1998) 217 ALR 386.  It was also necessary to consider whether, in all the circumstances, the offer by the respondent represented any real element of compromise or whether it was an “offer to capitulate” made essentially to trigger a possible claim at a later time for indemnity costs. 

23                  The applicant referred to Alpine Hardwoods (Aust) Pty Ltd v Hardys Pty Ltd (No 2) (2002) 190 ALR 121, where I observed that rejection of a reasonable offer was not the same as an unreasonable refusal to compromise.  It was the latter that the respondent was required to establish. 

24                  The applicant also submitted that the offer made to it by the respondent, namely to withdraw and pay the respondent $35,000, might be viewed as not constituting a genuine Calderbank offer.  That is particularly so in the light of doubts expressed in some of the authorities as to whether a “walk-away” offer can properly be characterised as an offer of compromise.  The applicant noted that, despite an assertion in the supposed Calderbank letter that the sum of $35,000 was significantly less than outgoings already incurred, there was no evidence to support that statement.  It submitted that it had not acted unreasonably in refusing to accept what it justifiably regarded as an ungenerous offer. 

25                  The present application is finely balanced.  The respondent has acted reasonably and responsibly in pointing out to the applicant, from the outset, the weaknesses in the applicant’s case.  It has openly flagged its defence and repeatedly warned the applicant that it would seek indemnity costs if that defence ultimately succeeded.  It also made an attempt to resolve this case without the need for a trial by its offer of 17 August 2007. 

26                  On the other hand, it would have been irresponsible of those advising the applicant to counsel surrender merely on the basis of assertions contained in correspondence from the respondent’s solicitors.  The matter becomes more problematic once discovery has been completed and evidence has been filed. 

27                  After giving this matter anxious consideration, I am not persuaded that the case brought by the applicant was so weak that it was unreasonable to pursue it.  Although the documentary trail leading back from the Villa View through to the Villa Grand and ultimately the Mawsons Lake home proved to be powerful evidence in support of the respondent’s denial that copying had taken place, that trail was littered with obstacles that had to be carefully navigated. The trail was not self-evident.  It had to be explained and evaluated.  Mr Wines only departed from his original opinion after being cross-examined at considerable length and being taken through the earlier plans in great detail. 

28                  Although a claim based on subconscious copying will always face obstacles, it cannot be said that such a claim lacks any chance of success.  Nor can it be said that the allegations of subconscious copying were made without any foundation.  I note, for example, that the respondent did not submit that there was no case to answer at the end of the applicant’s evidence.  Had there been no evidence to support a critical element of the applicant’s case, as was suggested, such a submission might have been made.  I recognise, of course, the risks associated with an election to pursue a course of that kind.

29                  I do not regard the applicant’s rejection of the offer contained in the letter of 17 August 2007 as having been imprudent or unreasonable.  The matter might have been different had the respondent offered to pay the applicant a sum by way of compromise.  Had the applicant discontinued the proceeding, it would probably have been liable for an amount similar to the $35,000 claimed in the offer.  There was little by way of genuine compromise in what the respondent was prepared to accept. 

30                  It follows that the application for indemnity costs must be refused.  The orders made on 18 June 2008 will stand.  The respondent must pay the applicant’s costs of and incidental to today’s hearing. 

Associate:

Dated:         25 June 2008