FEDERAL COURT OF AUSTRALIA

Granitgard Pty Ltd ACN 007 427 590 v Termicide Pest Control Pty Ltd ACN 093 837 337 (No 6) [2010] FCA 381

THE COURT ORDERS THAT:

1.                  Subject to this order and without prejudice to any costs order made in favour of the applicant to date in the proceeding, the applicant is to pay the respondent’s costs in respect of the claim including reserved costs, as follows:

(a)                as to those costs incurred up to 11.00 am on 26 September 2008 on a party and party basis; and

(b)               as to those costs incurred after 11.00 am on 26 September 2008 on an indemnity basis.

2.                  The taxed amount of any costs order made in favour of the applicant is to be set off against the amount of the costs taxed in accordance with order 1.

3.                  The applicant is to pay the respondent’s costs of and incidental to the costs application heard on 14 April 2010 to be taxed on a party and party basis.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

1                     This judgment is a sequel to the order which I made on 31 March 2010 dismissing Granitgard Pty Ltd’s (Granitgard) application. It should be read in conjunction with the reasons for judgment given that day: Granitgard Pty Ltd ACN 007 427 590 v Termicide Pest Control Pty Ltd ACN 093 837 337 (No 5) [2010] FCA 313 (the principal judgment).

2                     Upon my publishing the principal judgment the solicitors for Termicide Pest Control Pty Ltd (Termicide) foreshadowed that it may wish to apply for a special costs order, having regard to certain without prejudice correspondence and offers which had passed between the parties. Accordingly, I refrained from making any costs order that day. In the result Termicide did seek an order that, save in respect of costs orders already made, its costs should be taxed on an indemnity rather than a party and party basis from one or the other of two alternative dates selected by reference to two offers to compromise the proceeding which it had made.

3                     The first offer to compromise was made on 14 January 2008 under cover of a letter transmitted that day by Termicide’s solicitors to Granitgard’s solicitors. That offer expired on 30 January 2008 (the first offer).

4                     The second offer to compromise was made on 25 September 2008 under cover of a letter transmitted that day by Termicide’s solicitors to Granitgard’s solicitors. That offer expired on 10 October 2008 (the second offer).

5                     Neither of these offers was accepted by Granitgard.

6                     It will be necessary to refer to the terms of each offer and its covering letter in detail later in these reasons for judgment. Before so doing it should be noted that, given the date on which the second offer was made, it is relevant to have regard to the present form of O 23 r 11(6) of the Federal Court Rules when considering what effect, in the circumstances, the failure to accept that offer should have in terms of the basis upon which costs are taxed.

7                     On and from 2 August 2008, O 23 r 11(6) has provided:

(6)        If:

(a)        an offer is made by a respondent and not accepted by the applicant; and

(b)        the respondent obtains an order or judgment on the claim to which the offer relates as favourable to the respondent,

or more favourable to the respondent, than the terms of the offer;

then, unless the Court otherwise orders:

(c)        the respondent is entitled to an order that the applicant pay the respondent’s costs in respect of the claim incurred up to 11 am on the day after the day the offer was made,

taxed on a party and party basis; and

(d)        the respondent is entitled to an order that the applicant pay the respondent’s costs in respect of the claim incurred after that time, taxed on an indemnity basis.

8                     Before then, the rules had made express provision in relation to offers by respondents only in the following way in the then O 23 r 11(5):

(5)        If:

(a)        an offer is made by a respondent and not accepted by the applicant; and

(b)        the applicant obtains judgment on the claim to which the offer relates not more favourable than the terms of the offer;

then, unless the Court otherwise orders:

(c)        the applicant is entitled to an order that the respondent pay the applicant’s costs in respect of the claim incurred up to 11 am on the day after the day when the offer was made,

taxed on a party and party basis; and

(d)        the respondent is entitled to an order that the applicant pay the respondent’s costs in respect of the claim incurred after that time, taxed on an indemnity basis.

9                     Neither of these prescriptions in the rules as they stood from time to time can have any greater effect than signifying to those conducting litigation in the Court how, prima facie, they might expect the discretion which exists in relation to the awarding of costs to be exercised in those circumstances to which the rule applies. To afford such rules any greater authority would be impermissibly to fetter and inconsistent with the exercise of the discretionary power to award costs, which is conferred by s 43 of the Federal Court of Australia Act 1976 (Cth). The position is no different if, more accurately, s 43 should be regarded as only, in part, a source of power and also, in part declaratory of a power to award costs possessed by a court of equity, qv Caboolture Park Shopping Centre Pty Ltd (in liq) v White Industries (Qld) Pty Ltd (1993) 45 FCR 224 at 229. Another way of stating the same proposition is that the general discretionary power to award costs must be exercised judicially, not whimsically or capriciously, in the circumstances of a particular case and that a prima facie position for which the rules provide in relation to costs is always a relevant consideration in relation to the exercise of that discretion.

10                  On a number of occasions during the course of the trial and earlier interlocutory proceedings I made particular costs orders but otherwise reserved costs. The parties were agreed that, subject to the setting off from any award of any costs order made to date in its favour, and without prejudice to any special award of costs made to date in favour of Granitgard, costs should otherwise follow the event, i.e. Granitgard should pay Termicide’s costs of and incidental to the proceeding, including reserved costs to be taxed. The question is whether and to what extent those costs should be taxed on an indemnity rather than the usual party and party basis? Termicide did not suggest that there was any feature of Granitgard’s conduct in the proceeding, other than its non-acceptance of either or each of the offers which made it appropriate to order that costs should be taxed on an indemnity basis.

The First Offer

11                  Termicide’s solicitor’s letter of 14 January 2008 was in the following terms:

Offer of Compromise

1          We enclose by way of service upon the Applicant an Offer of Compromise made under Order 23 of the Federal Court Rules.

2          The essential issue in this case is your client’s claim that Termiglass is not an effective termite barrier and does not comply with the relevant Australian Standard.  However, the evidence already filed in the case shows that, since Termiglass was introduced in 2004, there have been in excess of 30,000 installations without a single instance of failure.  This should be sufficient by itself to establish the effectiveness of Termiglass as a termite barrier.

3          Your client relies upon the testing in 2004 by Drs Ewart and Holt.  There are obvious deficiencies with the testing procedures which were adopted and these were highlighted in Mr Franklin’s submissions to the Court in our summary judgment application.  A simple illustration is that Dr Ewart deposes that he received two bags of samples from Dr French and that he forwarded those samples to Dr Holt.  However Dr Holt only received one bag.  Furthermore Dr Holt did not sieve the material received to ensure that it fell within the mid-range sized particles which is used to make up the Termiglass barrier in accordance with the CSIRO Appraisal.

4          In short the evidence does not establish that Drs Ewart or Holt tested Termiglass.

5          This is a genuine offer to compromise the litigation.  A settlement in these terms will mean that the parties will no longer be required to commit time and resources to the case.  Obviously if the case continues then significant costs are likely to be incurred especially by way of additional expert evidence.  In this regard you will note that our client is prepared to significantly discount its claim for costs in the proceedings as an inducement to your client to terminate the litigation at this stage.

6          A settlement at this stage will also avoid any embarrassment or adverse publicity to your client.  Obviously if the case continues and results (as we expect it will) in a finding that Termiglass is an effective barrier and does comply with the relevant Standard then this is likely to cause significant embarrassment to your client as a major player in the industry.

7          We appreciate that, when these proceedings were commenced, your client acted in the belief that the 2004 testing showed that (in the words of the Statement of Claim) there is sufficient doubt about the effectiveness of Termiglass as a termite barrier. Any such doubt should be resolved by, firstly, the large number of installations which have occurred since 2004 without any report of failure and, secondly, the fact that Termiglass as a system has been recertified by the CSIRO and also independently by LTD Consultants.  Lastly, the deficiencies associated with the 2004 testing as discussed above means that the testing is not a proper basis to maintain the view that Termiglass is not an effective termite barrier system.

8          For completeness we should also mention that, although Dr Ewart expresses some reservations about the use of glass as a termite barrier, a brief literature search will show that glass has been extensively used as a termite particle barrier in North America, Europe and Asia (Japan).  There is extensive range of literature which has been published to confirm this. This material (which is easily accessible) will confirm the suitability of glass for this type of termite barrier.

9          If you have any queries or comments about the settlement proposal please do not hesitate to contact us.

10        This letter is sent on the basis that it is without prejudice but we reserve the right to place it before the Court on the issue of costs if the enclosed Offer of Compromise is not accepted and our client is subsequently successful in the litigation.

12                  The offer enclosed with that letter stated:

The Respondent offers to compromise these proceedings on the following terms:

1          The parties consent to an order that the proceedings be dismissed.

2          The Applicant pay one half of the Respondent’s costs of this proceedings [sic], such costs to be agreed or failing agreement, to be assessed or taxed under Order 62.

3          This offer is made pursuant to Order 23 and is in full and final settlement of all claims in these proceedings.

4          This offer will expire on 30 January 2008.

13                  As can be seen from a study of its terms, the then O 23 r 11(5), though directed to the subject of an offer of compromise made by a respondent, did not deal with the situation where an applicant’s claim fails completely such that the proceeding is subsequently dismissed. As I observed in Olivaylle Pty Ltd v Flottweg GMBH and Co KGAA (No 5) [2009] FCA 571 (Olivaylle No 5) at [8]:

An analogous lacuna in the then rules of the New South Wales Supreme Court moved a judge of that court to observe that the costs rule “discriminates irrationally against wholly successful defendants”: Notaras v Hugh [2003] NSWSC 919 at [5] per Sperling J. Various judges made recommendations that rules of practice be amended to remove this discrimination: Dal Pont, supra, at [13.16], fn 79. Order 23 r 11 was amended so as to address this lacuna by Federal Court Amendment Rules 2008 (No 1) (SLI 159 of 2008) which inserted a new sub-rule, sub-rule 11(6) into O 23 r 11.

14                  Termicide’s submissions in respect of its first offer proceeded upon the basis that the current O 23 r 11(6), the language of which is broad enough to apply in circumstances where an applicant’s claim is dismissed, was not applicable to any consideration of whether rejection of the first offer should, in the circumstances, sound in an order for indemnity costs. Granitgard did not submit to the contrary. For reasons which I gave in Olivaylle No 5 at [9] to [11], I agree that the current rule is not applicable to that consideration.

15                  The position which thus obtains in respect of  a consideration of the first offer is that Termicide does not have the benefit of any indication in the rules as to how, prima facie, the costs discretion should be exercised so far as the basis upon which any taxation of costs should be conducted. Instead, there is in respect of the first offer, no prima facie position. Rather, it is for Termicide to demonstrate why it is that, as a matter of discretion, indemnity costs should be ordered: CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Pty Ltd [2008] FCAFC 173 at [75]. In what has come to be regarded as a leading exposition on the subject Sheppard J in Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 discussed the power to award costs on an indemnity basis and, in a non-exhaustive way, gave examples of circumstances where, in the exercise of the costs discretion, the awarding of costs on that basis may be appropriate. One of the examples given by his Honour (at 233) was an “imprudent refusal of an offer to compromise”.

16                  Before proceeding further to consider the first offer, it is convenient, because, as in  Olivaylle No 5 at [12], I have used the expression “prima facie” to describe the effect of the current O 23 r 11(6), immediately to make some further observations about that sub-rule, even though it is applicable only to the second offer.

17                  In other cases other judges have used the expression “presumptive entitlement” to describe the effect of the current O 23 r 11(6). Such cases are helpfully collected by Finkelstein J in Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd (No 4) (Brookfield Multiplex No 4)[2009] FCA 803 at [7]. That is also (at [11]) his Honour’s tentative preference as to the construction of the sub-rule, it being unnecessary in that case for him to reach any final conclusion as to its meaning and effect. “Prima facie” and “presumptive entitlement” may be and in my opinion are just different ways of stating the same proposition. So, too, is the expression “rebuttable presumption” which was favoured by Termicide in its submissions concerning the construction of the current O 23 r 11(6).

18                  As a matter of language, the current O 23 r 11(6) describes a position which will apply unless the Court otherwise orders. That qualification necessarily implies that there must be a basis arising from the circumstances of a particular case for the Court “otherwise ordering”. In turn, because it will be in an applicant’s interest so to do, it further implies that an applicant must evidence something in those circumstances which is submitted to provide a basis for “otherwise ordering”. If an applicant does this, the Court must make a value judgment, taking into account that evidence, as to how the costs discretion should be exercised. I did not, in the end, understand Granitgard to contend for any different construction of the current rule. However, insofar as Granitgard’s submission carried with it, in respect of the current rule, any suggestion that a sufficient basis for “otherwise ordering” was to be found just in demonstrating that it had a reasonable case and had acted reasonably in not accepting the second offer, I reject that submission. To so view the construction of the rule would be inconsistent with the weight of the authorities collected and discussed by Greenwood J in Uniline Australia Ltd v SBriggs Pty Ltd (No 2) (2009) 82 IPR 56 (Uniline) at [45] to [48]. The better view in respect of the current rule is that to “order otherwise”, compelling and exceptional circumstances must be shown and that this is not done just by showing that the offeree had a reasonable case and had acted reasonably in rejecting the offer.

19                  Granitgard made the submission that the first offer should not be regarded as an offer to compromise at all. A like submission was made in respect of the second offer.

20                  In support of this submission Granitgard called in aid and relied upon a line of authority, the effect of which is that, where an offeree rejects an offer of compromise, be that offer one made under rules of court or a “Calderbank” offer,  which has, “the appearance more of a procedural move to trigger costs consequences than of a genuine attempt to reach a negotiated settlement”: The Uniting Church in Australia Property Trust (NSW) v Takacs (No 2) [2008] NSWCA 172 at [14] per Hodgson JA, McColl JA agreeing, and the offeror secures a more favourable result at trial, that offer does not give rise to any prima facie or presumptive entitlement on the part of the offeror to an indemnity costs order: see also Brookfield Multiplex No 4 at [12] where Finkelstein J collects further such authorities.

21                  The offer made in Brookfield Multiplex No 4 was of a kind sometimes described as a “walk away” offer, i.e. an offer that the plaintiffs withdraw the proceeding on terms that each party bear its own costs. One explanation which commended itself to Finkelstein J in that case as to why such an offer may not truly contain an element of compromise was that offered by Giles J in Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358 at 368, “Compromise connotes that a party gives something away. A plaintiff with a strong case, or a plaintiff with a firm belief in the strength of its case, is perfectly entitled to discount its claim by only a dollar, but it does not in any real sense give anything away, and I do not think that it can claim to have placed itself in a more favourable position in relation to costs unless it does so.”

22                  Even accepting this, there can be no hard and fast rule that a “walk away” offer can never amount to a “genuine” offer of compromise. For, as Finkelstein J further observed in Brookfield Multiplex No 4 (at [13]):

Take for example a case that has progressed for some time and the parties’ costs are quite high. In that event an offer to walk away may, in a business sense, be a significant offer: see for example Commissioner of Taxation v Evenfont (No 2) (2009) 223 FLR 28 at [31].

23                  InUniline at[38], Greenwood J made a similar point thus:

[38]      In the modern world of commercial litigation and various subsets of that litigation such as intellectual property litigation, costs are a very real and quantifiable concern. It would be extremely odd to think otherwise. Costs are incurred in a recoverable inter-parties sense from the moment the proceedings issue and they continue to be incurred at every point along the continuum of the litigation. Litigants who are required to pay these costs in order to assert or resist a claim, regard them as a very real and present expense, if not a real and present danger. Very often these costs are a significant business expense. They invariably require a commitment of significant resources and separate budget allocations. An offer to compromise which is framed in terms of a party’s willingness to abandon the recovery of costs so incurred along that continuum through the preparation and analysis of statements, disclosure, analysis of documents and the preparation and review of expert reports, is undoubtedly considered by the litigant as an offer that involves giving up something meaningful, real and measurable. This is particularly so after the completion of case managed preparatory steps at various phases of the litigation which may have the effect of front-end loading significant costs in order to save trial costs. In many cases although not in all cases, the notion that a party is giving up nothing by inviting another party to discontinue a claim on the footing that the offeror will not make any claim for payment of its costs incurred to the date of the offer, is a fundamentally abstracted notion from the practical perspective of the engaged litigant confronting the management of the proceeding and the appropriation of expenditure to conduct it. An offer, on the other hand, that invites discontinuance of a claim on the payment of the offeror’s costs to date offers not very much at all other than the stemming of future costs which in a particular case may nevertheless be very real.

24                  I have no doubt that the first offer was made in good faith. To use the description “not genuine” in respect of that offer might be thought to carry with it a pejorative quality which sits uneasily with regarding the offer as one made in good faith and with a recognition that a party which gives up half of what would otherwise be an entitlement to all of its party and party taxed costs to date on discontinuance is truly giving up something. Further, acceptance of the first offer would have given rise to an enforceable contract of compromise. For those reasons, and with all due respect to those who in earlier cases have used the adjectival description “not genuine”, its use may be apt to mislead. I should prefer not to use that description.

25                  Instead, in respect of the first offer, I prefer to approach the exercise of the discretion as to the basis upon which taxation should be directed to occur by accepting that it was truly an offer and that ultimately Termicide secured a more favourable outcome but considering whether the rejection of that first offer was unreasonable or imprudent in the then circumstances.

26                  At that stage, a summary judgment application had been heard and was awaiting determination. Granitgard had some scientific advice in respect of what it thought was Termiglass which suggested that its properties were such that it did not provide an effective barrier to subterranean entry notwithstanding what was said in the CSIRO Appraisal. Granitgard disputed that what had been tested was truly what was or what came to be known as Termiglass. As events transpired I dismissed Termicide’s summary judgment application early in the month which followed the making of the first offer, Granitgard Pty Ltd ACN 007 427 590 v Termicide Pest Control Pty Ltd ACN 093 837 337 [2008] FCA 55 but ultimately at trial concluded that Granitgard had not proved that the crushed glass which had been the subject of its then scientific advice was or was what came to be called Termiglass.

27                  The first offer strikes me as something of an afterthought following the hearing of the summary judgment application. In the principal judgment I have described Granitgard and Termicide as bitter market rivals. The submission made in the letter which covered the first offer did not, in my opinion, add anything of substance to the submissions which had already been made on behalf of Termicide on the hearing of the summary judgment application. Granitgard was invited to undertake a “literature search” in respect of the use overseas of particle barriers but it already had in its possession advice from two experts, Dr Holt and Dr Ewart as to what was then believed to be Termiglass.  Relative to the costs which later came to be incurred, Termicide’s costs at the time when the offer was made must have been modest.  It was nonetheless offering to give up something by offering to forgo half of its taxed costs at that stage. Precisely how much was being offered to be given up is controversial. It may have been as much as $20,134.00 or it may have been less than that, depending on the view that one takes as to the likely outcome of a party and party taxation in respect of Termicide’s costs at that stage. There was conflicting evidence before me on that subject. However one quantifies it though, there was, in this sense, an element of compromise in the first offer.

28                  Whether Termicide had engaged in misleading or deceptive conduct via statements on its website was under challenge supported by affidavit evidence from expert scientists, not mere assertion. It was not a frivolous claim. It raised triable issues. Granitgard’s claim was for injunctive relief. Termicide offered to make not the slightest alteration in its website. Nor, for example, did it promote a compromise which included some lateral solution such as further, independent appraisal as against the Australian Standard of what was undoubtedly the product marketed as Termiglass. At that stage, there truly were great unknowns for each side as to how, ultimately, the merits of the claim as then pleaded might come to be determined.  Though there was an element of compromise in the first offer, that offer was worse than a “walk away” offer. With all due respect, viewed in the then prevailing circumstances, it was a derisory offer. Taking into account the commercial interests at stake and the then stage of proceedings, including the evidence then to hand and the risks of litigation, it was not, in my opinion, an offer the refusal of which was either imprudent or unreasonable on Granitgard’s part. That is so even assuming in Termicide’s favour that the first offer involved it giving up as much as $20,134.00.

The second offer

29                  The second offer was sent under cover of a letter between the respective solicitors dated 25 September 2008, which was in these terms:

We have now forwarded to you a copy of the revalidation of the Technical Assessment for Termiglass which has been issued by the CSIRO.

The significance of this should be quite apparent to you.  The CSIRO has proceeded to revalidate the Technical Assessment despite your correspondence and the claims made by your client.  The CSIRO, as an independent body, has determined that there is no basis to your client’s allegations that Termiglass is not an effective physical termite barrier.

We believe it should be apparent from this that your client’s case against our client will not succeed.

Our client would like to conclude the litigation and avoid any ongoing costs associated with this matter.  With this in mind, we attach an Offer to Compromise made under Order 23.  You will see that our client has offered to waive 20% of the costs of the proceedings.  This is clearly a very significant concession bearing in mind the extent of the costs incurred so far.

30                  The offer to compromise in covered by the letter provided:

The Respondent offers to compromise these proceedings on the following terms:

1          The parties consent to an order that the proceedings be dismissed.

2          The Applicant pay eighty percent (80%) of the Respondent’s costs of these proceedings, such costs to be agreed or, failing agreement, to be assessed or taxed under Order 62.

3          Para 2 does not affect any existing costs orders made in these proceedings.  For the avoidance of doubt, if this offer is accepted, each party will still be entitled to the benefit of any costs order already made in its favour.

4          This offer is made pursuant to Order 23 and is in full and final settlement of all claims made by the Applicant in these proceedings.

5          This offer will expire on 10 October 2008.

31                  As I have already noted, Granitgard submitted that the second offer was not to be regarded as an offer for the purposes of O 23 r 11(6) because it was not a “genuine” offer but rather just a procedural move to trigger costs consequences. Reference was made to an apprehension which Finkelstein J had voiced in Brookfield Multiplex (No 4) (at [7]) as to there being two lines of authority in respect of whether the sub-rule gave rise to a “presumptive entitlement” to indemnity costs in the event of a more favourable outcome for a respondent at trial. Very properly, it was pointed out on behalf of Granitgard and the fact is that the two authorities cited by his Honour as tending against a “presumptive entitlement” approach, Seven Network Ltd v News Ltd (2007) 244 ALR 374 at [65]-[66] and Coshott v Learoyd [1999] FCA 276 were each decided prior to the amendment to the rules which inserted O 23 r 11(6).

32                  As I have already indicated, “presumptive entitlement”, “prima facie” and “rebuttable presumption” are each, in my opinion, different ways of giving the same meaning to the language employed in O 23 r 11(6). To treat that language as doing no more than requiring the Court to consider whether the rejection of the offer of compromise was imprudent or unreasonable would not just be to give a non-literal meaning to that language but to ignore it.

33                  Further and in any event, the rule does not operate in a vacuum divorced from the circumstances of the case and the submissions of an applicant who is the recipient of a judgment less favourable than the offer made by the respondent. In the event of such a judgment and in the absence of the applicant evidencing and relying upon anything in the circumstances to submit that prima facie effect should not be given to the rule there is no occasion for the Court to consider whether it should “otherwise order”. Instead, an order for taxation of costs on an indemnity basis would follow in accordance with the prima facie position. If, though, the applicant points to circumstances by reference to which it is submitted taxation ought not to be ordered on an indemnity basis the Court will have to consider whether in those circumstances the applicant has displaced the prima facie effect of the rule. If an applicant seeks to do this the Court must make a discretionary value judgement, in all of the circumstances, particularly including those respectively relied upon by the applicant and the respondent, as to whether it should “otherwise order”.

34                  I have already noted the line of authority which holds that an offer which is not a “genuine” offer of compromise is not an offer for the purposes of a costs regimes such as that found in O 23. For reasons given above, I prefer not to use the adjective “genuine” because of the unnecessarily pejorative quality it may carry with it. The same result is achieved, in my opinion, by acknowledging that one way in which an applicant may displace the “presumptive entitlement” or “prima facie” position or “rebuttable presumption” created by O 23 r 11(6) is by showing that the offer truly was so derisory that, even having regard to the risks of litigation, it effectively gave nothing away such that the Court should “otherwise order”. To use the adjectival description “not genuine” is to mask this. Further, the basis upon which in the exercise of the costs discretion a judge might “otherwise order” is not limited to a consideration of whether or not the offer in question was “genuine”. For example, even though “genuine”, it may be that the favourable outcome can be seen to have turned on some development in the case not then present or predictable, e.g. a body of what is truly fresh evidence.

35                  The second offer was made after the original trial dates had been vacated but prior to the commencement of the trial on the freshly allocated dates. It expired prior to the commencement of the trial on 20 October 2008. By that stage and after a degree of interlocutory controversy Granitgard had had the benefit of an opportunity to cause samples of what was Termiglass to be analysed. For reasons which I detail in the principal judgment, Granitgard’s availing itself of that opportunity was attended with some errors on the part of its advisors. Nonetheless, some of what was analysed truly was the product known as Termiglass. Those results were consistent with the opinion concerning Termiglass then recently reissued by the CSIRO and with the original CSIRO Appraisal.

36                  Further, not only by that stage was Granitgard aware that the CSIRO had reissued the appraisal, but also Granitgard had the benefit of a series of affidavits of Dr French as well as other affidavits filed in Termicide’s case in chief. The third of Dr French’s affidavits was not filed until 7 October 2008. This was filed a little after the requirement in para 8 of the directions made on 19 June 2008, which directed the filing and serving of any further affidavits for Termicide by 3 October 2008. Dr French’s third affidavit offered a very detailed critique of earlier affidavit evidence in chief and related reports given by Dr Ewart and by Dr Holt. Granitgard cannot have had this affidavit at the time when it received the second offer or for very long prior to the date fixed for the expiry of that offer. The same applies to the affidavit of Mr Schaffer (filed 7 October 2008) and that of Mr Meadows was filed even later (8 October 2008). Perhaps that is why there was no express reliance on these affidavits by Termicide in the context of the present costs controversy. For that reason, valuable though Dr French’s critique proved to be, I do not propose to regard that third affidavit as part of a factual matrix telling against Granitgard. The same applies to the affidavits of Messrs Schaffer and Meadows.

37                  Even putting the contents of these affidavits to one side, the position as at 10 October 2008 was radically different to that which prevailed in January 2008. Granitgard had broadened the basis of its claim for relief by late amendment of the statement of claim. That late amendment had added a challenge relating to whether the Vision Glass factory could consistently produce a sufficient proportion of particles in the medium range. The evidence on this subject was not all one way. One reason for this was a want of attention to detail on the part of Granitgard in ensuring that it could prove on the balance of probabilities that all of the samples obtained from the factory and analysed were indeed samples of Termiglass. Such as were had been shown by analysis to be within a range likely to be regarded as a “sufficient proportion”.

38                  Further, ignoring the influence of the “Granitgard Protocol”, the jar tests which had by then been conducted in respect of what was truly Termiglass did not support Granitgard’s position but were consistent with the basis upon which the CSIRO had originally appraised and then but recently re-appraised that product as installed in Termicide’s barrier system as meeting the Australian Standard. The continuing absence of reference to the “Granitgard Protocol” in the CSIRO Appraisal ought, in my opinion, to have given pause for thought about whether to persist, by reference to that protocol, in damning Termiglass and the system in which it was deployed was to set too high a bar for compliance with the Australian Standard. 

39                  The evidence as to what had caused the termite infestation at the Lagoona Court property, even at that stage, was not, on objective analysis, all one way. Granitgard must have known, having regard to the evidence already filed and served, that Termicide was persisting in its stance that, even after the passage of some years and many thousands of installations, there had not been a single breach. Mr Gabriel and Mr Baverstock had yet to emerge as witnesses. Granitgard did not then have any evidence which, if accepted, supported a finding of systemic failures by breaching of Termicide’s barrier system as installed.

40                  Yet further, even looking just to Dr French’s first two affidavits, Granitgard’s case necessarily entailed persuading the Court that the opinions of the man whose scientific expertise in no small measure underpinned the barrier system which it marketed were not to be preferred in relation to Termicide’s barrier system. And that in the face of the CSIRO being disposed initially to issue and then but recently to reissue its appraisal on the strength of, materially, Dr French’s opinions. There could most certainly not be any presumptive superiority in the opinions of Dr French but the two factors which I have mentioned ought, in my opinion, also to have given pause for thought about the strength of Granitgard’s case.

41                  Order 23 r 11(6) forms part of a regime the aim of which is to encourage compromise with the attendant benefits for the parties in terms of agreed certainty of outcome, as opposed to the risks of litigation and for the nation in terms of allowing limited judicial resources to be deployed in the resolution of the truly intractable controversies. It does this by encouraging a respondent to make a realistic offer of compromise and encouraging an applicant who receives such an offer to accept it lest, if the respondent obtains a more favourable judgement, the applicant become liable to a greater amount of costs as a result of the respondent having a prima facie entitlement to taxation on an indemnity basis. One way of viewing cases which have termed an offer “not genuine” is to regard them as examples of cases where the offer could be seen not to advance the underlying purpose of an order such as O 23.

42                  Had Termicide made a “walk away” offer or even again made an offer to accept but 50% of its taxed party and party costs leaving existing costs orders undisturbed, I should not have had any doubt in holding that, in the circumstances which I have described, Granitgard could not show that there was a basis for “otherwise ordering”. There would have been very real advantages in the savings entailed in accepting such an offer, even though those savings went only as to a costs liability. That is so irrespective of whether the outcome of any taxation would have been as estimated by Mr Philp of Termicide’s solicitors in his affidavit or more conservatively having regard to the lower recovery percentage to which Ms O’Neill of Granitgard’s solicitors referred in her affidavit.

43                  The precise amount of the benefit conferred by the second offer is controversial depending on whether the outcome of a party and party taxation would have been as generous as that opined by Mr Philp or more conservative as opined by Ms O’Neill. I accept that it does not necessarily follow that Termicide would be allowed the costs of senior and junior counsel at trial. That is an open question. Neither party suggested that it was necessary to reach a concluded view in a summary way about the amount of the taxed party and party costs. That was because each accepted that the 20% discount offered yielded more than a trifling sum even though it may not be as high as the $53,935 saving suggested by Mr Philp.

44                  The second offer was nowhere near as generous for the applicant as either of the conjectural alternatives which I have mentioned. Given this, I have found answering the question as to whether Granitgard has displaced the prima facie position for which the rules provide more difficult to answer.

45                  Ms O’Neill has sworn that she and thus Granitgard, acting on her advice, did not regard the second offer as a “genuine attempt to reach a compromise and to resolve the proceedings”. Though I do not favour the use of the adjective “genuine” the body of authority which she had in mind is clear enough. Even so, Granitgard did not afford Termicide the courtesy of a considered reply as to why, notwithstanding its titling, the offer was not regarded as one to which the rules applied and any other reason why it was not being accepted.

46                  It is very important, particularly where the clients themselves are bitter commercial rivals, that their respective legal advisers retain a degree of objective detachment from that bitterness. I do not infer that Granitgard’s legal advisers lacked such detachment but do observe that one way of manifesting that detachment would have been to give a considered reply to the second offer. The discipline of at least drafting such a reply may well have given pause for thought about the wisdom, in light of possible adverse costs consequences, of an uncommunicated, peremptory refusal.

47                  The covering letter sent by Termicide’s solicitors was terse but made the valid point that the CSIRO should be regarded as independent and had recently chosen to re-issue the original appraisal. Granitgard had no evidentiary basis for questioning that independence. Yet it seems to have given no weight to that re-issuing of the appraisal, seemingly treating it as nothing more than an uncritical rubber stamping of the opinions of others. Taking into account the then state of the evidence, that was a considerable step. More particularly, Granitgard did not at the time evidence by reply why it was giving that appraisal no weight in the context of the offer which had been made.

48                  In many ways, the end result of the proceeding was no different than that portended by the re-issuing of the CSIRO appraisal. There was no new body of evidence that decisively occasioned that outcome for Termicide, only an in depth explanation and analysis of existing evidence. The truly fresh evidence came much later and ultimately to no avail in Granitgard’s case.

49                  The second offer was, in my opinion, an offer of compromise for the purposes of the Federal Court Rules. It had that quality even though the only benefit it conferred went to costs. That benefit was not a trifling one. The second offer did otherwise invite capitulation but in so doing it did not overstate a legitimate forensic prospect on the evidence to hand in light of the then recent re-issuing by the CSIRO of the appraisal.

50                  In not accepting the second offer and pressing further its claim for relief Granitgard took a commercial risk in its litigious dealings with a competitor. The case Granitgard chose to press went to the very heart of the efficacy of a competitor’s product and system. It may readily be inferred that, viewed against its wider commercial context, there was much at stake in the litigation in terms of market repute and share and thus profit. Granitgard remained entitled to its day (many days as it transpired) in court. However, on and from the expiry of the time limited for the acceptance of the second offer, part of the risk Granitgard thereafter assumed, if conclusions as to the suitability of Termiglass as deployed in Termicide’s barrier system and consistency of quality were not as Granitgard contended was that Termicide might secure a more favourable outcome at trial in circumstances where, on and from 2 August 2008, the rules of the court in which Granitgard chose to press further its claim included O 23 r 11(6). That rule did not and could not validly specify an automatic position as to the basis upon which costs would come to be taxed in the event that that contingency came to pass but it did reveal for each side what the prima facie position would be. Termicide did obtain at trial a more favourable outcome than that set out in the second offer.

51                  Having regard to each of the factors which I have mentioned, especially the then recent re-issuing of the CSIRO appraisal, Granitgard has not, in my opinion, in the face of these factors, displaced the prima facie position for which the rules provide. In my opinion, a judicial exercise of the discretion as to costs requires, in these circumstances, that effect be given to that prima facie position so far as the basis upon which taxation is conducted is concerned. That is so whether, as I apprehend the weight of authority, it is for Granitgard to demonstrate compelling and exceptional circumstances or whether, alternatively, it must show that it was not imprudent or unreasonable not to have accepted the offer.

52                  So far as the application for a special order in respect of costs was concerned, each party agreed that the costs of that application should follow the event but be taxed on a party and party basis. I agree that such an outcome is appropriate.

53                  For completeness, I should record that Termicide advanced an alternative argument whereby it contended for a percentage uplift over and above party and party taxation such as that which Greenwood J came to order in Uniline (though not necessarily the same percentage). It is unnecessary to consider this alternative submission because, in my opinion, Termicide is entitled to an order for taxation on an indemnity basis in accordance with the prima facie effect of O 23 r 11(6).

54                  I shall make orders accordingly.

Associate:

Dated:         21 April 2010