FEDERAL COURT OF AUSTRALIA

Racing & Wagering Western Australia v Software AG (Australia) Pty Ltd
(ABN 30 090 139 503) No 2 [2008] FCA 1526

COSTS – indemnity costs – was rejection of offer reasonable or prudent – was exaggerated counter offer and cross-claim relevant to a claim for indemnity costs

Held:  indemnity costs ordered.

Copyright Act 1968 (Cth) ss 47C, 47F

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

Black v Lipovac (1998) 217 ALR 386

Digga Australia Pty Ltd v Norm Engineering Pty Ltd (No 2) [2008] FCAFC 76

Flemington Properties Pty Ltd v Raine & Horne Commercial Pty Ltd & Anor [1998] FCA 53

Imbree v McNeilly [2008] HCA 47

Racing & Wagering Western Australia v Software AG (Australia) Pty Ltd (ACN 090 139 503) [2008] FCA 1332

Sanko Steamship Co Ltd v Sumitomo Australia Ltd [1996] FCA 22

Seven Network Ltd v News Ltd (2007) 244 ALR 374

University of Western Australia v Gray (No 21) [2008] FCA 1056  

RACING & WAGERING WESTERN AUSTRALIA v SOFTWARE AG (AUSTRALIA) PTY LTD (ABN 30 090 139 503)

WAD 304 of 2006

MCKERRACHER J

14 OCTOBER 2008

PERTH

THE COURT ORDERS THAT:

1.                  The respondent do pay the applicant’s costs of the proceedings:

(a)     to be taxed on a party and party basis until 11 May 2007; and

(b)     thereafter the respondent do pay the applicant’s costs of the proceedings to be taxed so as to include all costs and disbursements except insofar as they are of an unreasonable amount or have been unreasonably incurred so that subject to those exceptions, the applicant will be completely indemnified by the respondent for its costs after 11 May 2007.

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

REASONS FOR JUDGMENT

1                     On 29 August 2008 judgment was given in favour of the applicant (Racing & Wagering Western Australia v Software AG (Australia) Pty Ltd (ACN 090 139 503) [2008] FCA 1332) (the main judgment).  I invited the parties to make additional submissions in relation to costs and whether or not there should be injunctive relief.  The applicant has advised that it does not now press for injunctive relief although that had been part of its original claim. 

Indemnity costs claimed

2                     The applicant applies for costs on a party and party basis until 20 April 2007 and thereafter on an indemnity basis. 

3                     The applicant pursues a costs order on this basis on three grounds.  The first is that an offer of compromise was made on 10 April 2007.  It was clarified on 20 April 2007.  The offer was that the applicant would pay the sum of $300,000 for the future use of the DR Site as defined in the main judgment.  There were additional features of this offer to which I will refer below.  The offer was rejected.  The second ground relied upon is the ‘exaggerated nature of the respondent’s cross-claim’.  Reliance is placed on [20], [23]-[28], [137]-[148] and [253]-[267] of the main judgment.  Thirdly, the applicant relies upon the non-discovery by the respondent of a critical DAF (as defined in the main judgment).  This document reflected the actual fee which the respondent proposed to seek from the applicant for the DR Site.  It was a sum far less than that pursued in the primary claim at trial.  At trial, no sum at all was awarded to the respondent.  As to the late discovery, see [137]-[138] of the main judgment.

Offers

4                     In this litigation there were several offers exchanged between the parties.  The chronology of those exchanges is as follows.  The proceedings were initiated on 26 October 2006.  On 12 September 2006, prior to the commencement of the proceedings, the respondent quantified its claim in respect of a DR licence fee (as defined in the main judgment) at a figure of $932,690 plus DR maintenance fees (as defined in the main judgment) of $139,903 per annum exclusive of GST. 

5                     On 16 October 2006, the respondent offered to discount the claimed DR fee (as defined in the main judgment) by 30% to a figure of $652,883 and to seek DR maintenance fees for three years at $441,044.  It offered to waive any back maintenance DR fees offering, therefore, to accept in total $1,093,927 in relation to the DR Site. 

6                     On 15 December 2006, the respondent made a further offer to accept $847,417 which it expressed to be a final offer.  It withdrew that offer and reverted to the original claim of $932,609 plus $139,903 per annum as claimed on 12 September 2006. 

7                     The 10 April 2007 offer in respect of which the applicant’s claim is based was set out in a letter of that date to the respondent’s solicitors.  The applicant made an offer of compromise:

·                    to enter into a new fixed term contract for a period of three years with the respondent;

·                    the contract was to be based on upgraded hardware that the applicant agreed to pay for in accordance with the respondent’s pricing;

·                    to pay the respondent a fixed fee component of $300,000 over a three year period for the use of the DR Site. 

8                     There has been some suggestion that there may have been confusion about the substance or effect of the offer.  That suggestion was raised in correspondence from the respondent’s solicitors on 18 April 2007.  That the offer was in the terms outlined above was clarified by a letter in response from the applicant’s solicitors dated 20 April 2007 and it is from that date that the applicant seeks indemnity costs. 

9                     At that stage the respondent had neither filed a defence or given discovery so, at least insofar as the litigation component itself was concerned, had not incurred significant party and party costs.  The defence was filed on 11 September 2007.  Discovery was given on 15 November 2007. 

10                  The applicant contends that the 18 April 2007 reply from the respondent to the 10 April 2007 offer reflected the respondent’s practice of substantially exaggerating the amount of its claim.  In the 18 April 2007 letter, the respondent’s solicitors purported to seek a DR fee ‘based on alleged new information’ showing that the applicant’s DR Site greatly differed to the information the respondent had when it suggested pricing to the applicant in its letter of 16 October 2006.  From the 18 April 2007 response date, the claim from the respondent was for sums totalling almost $3.2 million plus GST or a total of more than $3.5 million.  In the main judgment I rejected any such argument of new information, at least in the terms it was expressed at trial (main judgment at [139]-[140]).

11                  No further offers were made from the respondent for a period of time.  Then about a year later on 5 May 2008, the respondent offered to accept a DR fee of $2,150,209 plus GST plus ongoing maintenance fees for the DR Site of $322,538 plus GST per annum.  It offered to waive backdated DR maintenance fees and said that the fees which were due to it at that date totalled approximately $1,048,250 plus GST.  The applicant declined to accept that offer. 

12                  There was a further final offer on 5 June 2008 which was made very shortly prior to the trial (which commenced on Monday, 9 June 2008).  In that offer, the respondent made a further offer of $932,690 which was the amount of the original DR licence fee claimed on 12 September 2006.  The offer was open for acceptance only until 9.00 am on Monday, 9 June 2008. 

Outcome at trial

13                  Analysis of the precise form, content and amounts of the offers does not present a difficulty in the present situation as the respondent recovered no damages or other award of any nature at the trial.  It follows that the original offer of $300,000 made on 10 April 2007 and clarified on 20 April 2007, had it been accepted, would have been more advantageous to the respondent than the outcome after trial. 

Principles

14                  While it is clear that ordinarily costs will follow the event and be awarded on a party and party basis, there is an unfettered discretion in awarding costs, subject always to the discretion being exercised judicially. 

15                  It does not necessarily follow that because an applicant made an offer of compromise and then achieved a better result at trial, that an award of indemnity costs is justified.  That said, I note that in a very recent decision of the High Court in Imbree v McNeilly [2008] HCA 47 in a joint judgment, the High Court awarded indemnity costs solely, it seems on the basis of an award of damages substantially exceeding the amount for which an offer had been made.  (It must be said that the disparity between the offers and the outcome was substantial). 

16                  The approach taken in Alpine Hardwoods (Aust) Pty Ltd v Hardys Pty Ltd (No 2) (2002) 190 ALR 121 at [27]-[28], in following the Full Federal Court in Black v Lipovac (1998) 217 ALR 386 was that is necessary to focus on the reasonableness of the conduct of the offeree in rejecting the offer.  Insofar as the applicant relies upon a rejection of the offer of compromise, the applicant must demonstrate that the conduct of the respondent was imprudent or unreasonable.  However, the cases have also stressed that there is no super added requirement that it show a higher standard of unreasonableness such as ‘plainly unreasonable’:  see Black v Lipovac at [218], Seven Network Ltd v News Ltd (2007) 244 ALR 374 at [59]-[62] and University of Western Australia v Gray (No 21) [2008] FCA 1056 at [36]. 

17                  The view has also been expressed recently in Digga Australia Pty Ltd v Norm Engineering Pty Ltd (No 2) [2008] FCAFC 76 at [25]-[26] that the preparedness or otherwise of the unsuccessful party to contemplate a careful consideration of its legal position and to engage in sensible settlement discussions is a relevant consideration. 

18                  I accept the respondent’s submission that the Court’s discretion to order indemnity costs should be exercised carefully.  In the earlier decision of Sanko Steamship Co Ltd v Sumitomo Australia Ltd [1996]FCA 22, Sheppard J cautioned against too readily imposing an indemnity costs order.  His Honour agreed with judicial statements that the fact that the law does not normally provide a full indemnity for costs may be an important spur to settlement and that the ‘Calderbank approach may place a weapon in the hands of parties to the litigation which ought not be allowed to be abused’.  His Honour said that the ordinary rule ‘should only be departed from where the conduct of the party against whom the order is sought is plainly unreasonable’ (emphasis added). 

19                  The addition of ‘plainly’ before ‘unreasonable’ was rejected by the Full Court of this Court on appeal in Black v Lipovac 217 ALR 386 at [218].  Although that case is a decade old the content at [217] and [218] is entirely apposite to the present case: 

217.     There is a line of authority in the Federal Court supporting the proposition that the mere refusal of a Calderbank offer does not of itself warrant an order for indemnity costs and the offeror needs to show the conduct of the offeree was unreasonable.  The cases are WCW Pty Ltd v Charthill Ltd (Olney J, 7 July 1992, unreported), John S Hayes & Associates Pty Ltd v Kimberley-Clark Australia Pty Ltd (1994) 52 FCR 201 (Hill J), Sanko Steamship Co Ltd v Sumitomo Australia Ltd (Sheppard J, 7 February 1996, unreported), MGICA v Kenny (1996) 140 ALR 707 (Lindgren J), Fasold v Roberts (Sackville J, 11 September 1997, unreported).  To the contrary is the decision of Rolfe J in the Supreme Court of New South Wales in Multicon Engineering Pty Ltd v Federal Airports Corporation (20 June 1996, unreported).  His Honour considered that the non-acceptance of an offer more favourable to the offeree than the judgment ultimately awarded prima facie demonstrated unreasonable conduct and the offeree bore the onus of showing why indemnity costs should not be ordered.

218.     In reality there is not a substantial difference between the two views; both accept that the reasonableness of the conduct of the offeree, viewed in the light of the circumstances which existed when the offer was rejected, is relevant to the exercise of the discretion to award indemnifying costs.  To the extent there is a difference, we would prefer the by now well established line of authority in decisions of single judges of this Court.  However, we would not, with respect, necessarily endorse the view of Sheppard J in Sanko that the conduct of the offeree has to be “plainly unreasonable”.  To adopt an especially high standard of unreasonableness would operate as a fetter on the discretion to award indemnity costs and diminish the effectiveness of the Calderbank offer as an incentive to settlement.  There is in our view force in the comments of Byrne J in the Supreme Court of Victoria in Mutual Community Ltd v Lorden Holdings Pty Ltd (unreported, 28 April 1993) at 12-13:

“The policy of the Court is to encourage litigating parties to undertake genuine settlement negotiations and, for that purpose, to face up to serious offers of settlement.

The response of a litigant in receipt of an offer of settlement will always be affected by the prospect that the sum which the Court might order including party and party costs may be less advantageous than the terms of the offer.  Experience, however, shows that this prospect alone is not always sufficient to compel a litigant to face up to the offer.  The further prospect of a super-added costs penalty if a reasonable offer be not accepted is a salutary inducement to an offeree to undertake this often painful task.” (emphasis added)

20                  As to the reasonableness of the respondent’s conduct, the respondent relies on the fact that in advancing the arguments as to the proper construction of the licence agreement and the proper interpretation to be given to the relatively new provisions of the relevant sections of the Copyright Act 1968 (Cth), the following factors are important:

1.                  there are no decided cases that are clearly inconsistent with the respondent’s contentions on the proper construction of the contractual terms;

2.                  the contractual terms were fairly arguable and it could not be said that they were hopeless or had such low prospect of success as to warrant a finding that the applicant’s offers ought to have been accepted.  It could not be said that the construction questions were ‘reasonably capable of only one answer’ as in Flemington Properties Pty Ltd v Raine & Horne Commercial Pty Ltd & Anor [1998] FCA 53;

3.                  there are no cases on s 47C or s 47F of the Copyright Act inconsistent with the respondent’s contentions, hence resort was had to explanatory material on the legislation which also did not, on the respondent’s submission, clearly deal with or unequivocally support the applicant’s arguments. 

21                  The arguments for the applicant, however, expressly accept for purposes of their claim for indemnity costs, the reasonableness of the respondent’s legal argument.  The applicant’s submissions focus squarely on the unreasonableness of the behaviour in advancing an excessive claim in response to a reasonable offer of a commercial compromise.  As to that, however, the respondent says that the amount of the claim is based on the respondent’s interpretation of the provisions of both the licence agreement and the Copyright Act. 

22                  The respondent argues that the 10 April 2007 letter offer merely set out a proposed commercial arrangement.  It did not set out in any manner at all why the contentions by the respondent would inevitably fail.  Equally, the letter of 20 April 2007 clarifying the offer, once again, contained no particularity as to the predicted outcome at trial.  It was complained that the first offer was left open for acceptance for a period of 30 days only. 

23                  As to this, while it may be a matter of impression or judgment, it seems to me that from the several exchanges which had occurred between the parties prior to the making of this offer, that it was the respondent which was advancing an argument as to construction of the licence agreement and the Copyright Act.  It was in reality the respondent which was the initiator of the adversarial dispute between the parties as it was the respondent contending that the applicant was in breach of both the licence agreement and the Copyright Act even though it was at all times the applicant’s view that this was not even arguably so.  That view prevailed.  If anyone at the time of making the offers had an onus of demonstrating the strength of the argument being raised, that onus rested on the respondent. 

24                  While the offer in the 10 and 20 April 2007 correspondence was for substantially less than that sought by the respondent, it was, self-evidently, advanced as a commercial compromise to avoid the risks as to irrecoverable costs (and to the commercial relationship) that would be involved in conducting a full trial.  A prudent course would have been to accept the offer or make a counter-offer for reasonable yet still more advantageous terms. 

An exaggerated claim

25                  In this regard, the main focus of the applicant is that even if it be assumed that the respondent’s contentions as to the proper construction of the licence agreement and the proper interpretation of the Copyright Act 1968 (Cth) were fairly arguable, nevertheless the quantum of the cross-claim was at all times, and particularly on and after 18 April 2007, ‘grossly exaggerated’.  The applicant argues that the respondent’s radical revision of the quantum of its claim on 18 April 2007 in response to the offer of 10 April 2007 for reasons which could not possibly be sustained (as found in the main judgment), meant that the conduct was unreasonable. 

26                  The applicant argues that the true value of the respondent’s cross-claim allowing for a discount of 30% on the claimed DR licence fee as allowed on 16 October 2006 was at its absolute highest, $1,093,927.  But as the applicant points out, even the claimed discount at only 30% was revealed to be incorrect and without foundation as the documents revealed at trial. 

27                  Moreover, the DAF actually prepared in 2006 which was very belatedly discovered on the second last day of the trial demonstrated that in fact the true value of the respondent’s cross-claim in terms of the sum it was actually hoping to receive from the applicant at the actual time of negotiations was only ever in the order of $640,300 (main judgment [138] and [146]). 

28                  Further, that figure was a gross amount without taking into account expenses such as commission fees payable to the head licensor and other overheads.  None of these items was proven. 

29                  The respondent argues that in response to the applicant’s contention as to the exaggerated nature of the cross-claim, first, that such an allegation does not provide a basis for an award of indemnity costs.  Secondly, it says the respondent’s ‘primary claim’ was for a negotiated licence fee based on a discount that matched the average level of discount evidenced by all of the new contracts entered into by the respondent and its customers over a two year period.  That was the position ultimately taken at trial (the amendment as to the primary claim being made at the beginning of the trial).  The respondent argues that the fact that there was a shift of approach does not afford a basis for an award of indemnity costs.  That is so, according to the respondent, because the applicant is entitled to recover the cost of work carried out in dealing with the respondent’s claim in the course of getting the matter up for trial. 

30                  It is correct that the claim advanced by further amendment at trial necessarily appeared to be a claim for a lesser amount than was claimed immediately up to the trial.  The argument for the applicant though is that the manner in which the trial evolved showed in itself how exaggerated the respondent’s claim had been up to the very eve of the trial (including the offer made by the respondent very close to the commencement of the trial).  If I were to award indemnity costs only until the date of the amendment, made shortly after the commencement of the trial and party and party costs thereafter, this would signal encouragement to hold out for a far higher sum than really sought until the actual trial.  But more importantly, the respondent did not abandon its original or primary cross-claim (which the applicant had to defend) but amended by adding a new cross-claim as an alternative).  It would not be accurate to describe that alternative cross-claim as its primary claim. 

31                  Whichever way the matter is viewed, the offer by the applicant of $300,000 made at the very early stage of the proceedings before the respondent had incurred substantial costs, was reasonable.  In my view, to not only reject the offer but to counterclaim in sums which were, on the findings in the main judgment, plainly exaggerated was imprudent. 

Late discovery

32                  The applicant argued that the crucial DAF prepared in 2006 was the single most important and relevant document in relation to the quantum of the cross-claim.  The inadequacy of the initial discovery in relation to such a key document and the failure to correct it until so late in the trial was not adequately explained. 

33                  The respondent contends that this late discovery does not afford a basis for an award of indemnity costs.  It argues that the late discovery should not be taken into account on the applicant’s claim for indemnity costs in the absence of any finding as to any deliberate attempt to withhold the DAF.  It was submitted by the respondent that there was no prejudice to the applicant as the applicant was able to deal with the DAF in cross-examination and submissions. 

34                  It is also argued that even if there were adverse findings in relation to a failure to promptly discover the DAF, such a failure would only have potential costs implications if, for example, the failure gave rise to an adjournment or if the applicant lost at trial but sought an order in relation to costs associated with the time taken in relation to the issue of non-discovery. 

35                  Giving the respondent the benefit of the doubt on the late discovery, it is still, as a practical matter, entirely conceivable that if that document had been properly discovered at the appropriate time, there may not have been a trial at all.  The explanation given as to the reason why the sum publicly claimed was so different from the sum which would in truth be sought as indicated in the internal DAF was, in my view, unconvincing. 

36                  Nevertheless, as I propose making an order for indemnity costs on the basis of the imprudent rejection of the offer taken with the exaggerated claims pursued by the respondent, I do not propose to rely on the late discovery for supporting the order.  Taken alone, in my view, it would not support the order sought for indemnity costs although I accept that there is a plausible argument that it ought to be taken into account in considering whether or not such an order should be made. 

37                  It is appropriate however to award indemnity costs from 21 days from the date of the clarified offer of 20 April 2007.  In light of the content of the 10 April offer, that is a reasonably sufficient time for consideration of the offer. 

Conclusion

38                  For the reasons expressed above, I make the following order:

1.                  The respondent do pay the applicant’s costs of the proceedings:

(a)     to be taxed on a party and party basis until 11 May 2007; and

(b)     thereafter the respondent do pay the applicant’s costs of the proceedings to be taxed so as to include all costs and disbursements except insofar as they are of an unreasonable amount or have been unreasonably incurred so that subject to those exceptions, the applicant will be completely indemnified by the respondent for its costs after 11 May 2007.

Associate:

Dated:         14 October 2008