FEDERAL COURT OF AUSTRALIA

Flashback Holdings Pty Ltd v Showtime DVD Holdings Pty Ltd (No 7) [2010] FCA 913

THE COURT ORDERS THAT:

1.                  Mr Leslie pay Flashback’s costs of Flashback (No 4) and (No 5) on an indemnity basis.

2.                  Each party bear its own costs of the costs application.

3.                  Mr Leslie otherwise pay Flashback’s costs of the proceedings.

4.                  Order 62 r 36A(1) Federal Court Rules not apply to these proceedings.   

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                     On 2 July 2010 I gave judgment in favour of Flashback Holding Pty Ltd (“Flashback”) and against William Nigel Heydon Leslie (“Mr Leslie”) which was determined on 16 July 2010 to be the sum of $40,000 plus interest pursuant to s 51A Federal Court of Australia Act 1976 (Cth).  Flashback now applies for an order that its costs of the proceedings be paid by Mr Leslie on an indemnity basis.  On Mr Leslie’s behalf it is submitted that the appropriate order is one for party/party costs only. 

2                     The debate between the parties is generated by three events.   These are:

(a)        an earlier fusillade of interlocutory disputation which resulted in Mr Leslie’s defence being struck out and judgment on liability entered against him;

(b)       a contested hearing on 15-16 June 2010 on damages resulting in judgment against Mr Leslie for $40,000 to which reference has already been made; and

(c)        the making by Flashback of an offer on 8 June 2010 to forego any entitlement to damages and to accept instead the sum of $131,407.80 representing 70 per cent of Flashback’s professional costs and disbursements in settlement of the entire proceedings.  

3                     Flashback submits that the circumstances surrounding the entry of judgment against Mr Leslie bespeak such unreasonable behaviour on his part that the Court should mark its disapproval with an indemnity costs order.   It also submits that given the generosity of its offer of 8 June 2010 and the forensic parlousness of his own position it was unreasonable of Mr Leslie to decline that offer and that the litigation was pointlessly prolonged by this stubbornness.  Again, the solution is said to be to require Mr Leslie to pay the costs incurred during the period after he declined the offer on an indemnity basis.  Finally, Flashback seeks to characterise Mr Leslie’s conduct of the entire proceedings as being unreasonable from beginning to end and, therefore, warranting the making of indemnity costs orders.  Mr Leslie sees things differently: the offer was made on the eve of the trial, left him only three days to raise the money and required complete capitulation on his part; the striking out of his defence was regrettable but reasonably explicable; and, overall the proceedings had not been conducted unreasonably.

4                     In my opinion the circumstances which gave rise to the entry of judgment against Mr Leslie do warrant the making of an indemnity costs order.  However, I do not think that Mr Leslie’s refusal to accept the offer of 8 June 2010 should result in an order of that kind.  Nor do I think that there should be an overall indemnity costs order.  My reasons for these conclusions are as follows.

The striking out of Mr Leslie’s defence and the entry of judgment against him

5                     At an earlier stage in these proceedings I made self-executing orders designed to increase Mr Leslie’s (and his company Showtime’s) attendance to discovery orders which had been made.  Those orders were not complied with.  The self-executing orders provided for the striking-out of Mr Leslie’s and Showtime’s defences and for the entry of judgment against them.  In due course, and after the date on which that occurred, Flashback moved the Court for further     orders to confirm that the self-executing orders had indeed taken effect.  Following a contested hearing, orders of that kind were in fact made on 8 May 2009 in Flashback Holdings Pty Ltd v Showtime DVD Holdings Pty Ltd (No 4) [2009] FCA 461 when the Registrar was directed to record that the defences had been struck out and judgment entered.  On that occasion I made no order as to costs.

6                     At no time in Flashback (No 4) was it suggested that the self-executing orders should be revoked.  Subsequently,Mr Leslie and Showtime then applied to revisit the determination in Flashback (No 4) that the self-executing orders had been enlivened.  This I declined to entertain on the basis that nothing had changed since Flashback (No 4) so that there was no justification for the revisiting of a prior interlocutory order.  However, I indicated that had the question been revisited I would have concluded that the failure to give discovery was “neither trivial nor accidental”: Flashback Holdings Pty Ltd v Showtime DVD Holdings Pty Ltd (No 5) [2009] FCA 859 at [20].   During the hearing on 28 May 2009, which lead to the decision in Flashback (No 5), an oral application to revoke the original self-executing orders was made which I permitted to be entertained.  Having heard that application I then rejected it on the basis that:

(a)        the original order had not been inappropriate in terms of the time period it had set;

(b)       the non-compliance with the order had demonstrated “a degree of nonchalance towards this Court’s orders that travels well into the realm of reckless indifference”: Flashback (No 5) at [43];  and

(c)        discovery, even at that late stage, had still not been given.

7                     I dismissed the application to reconsider my decision in Flashback (No 4) with costs: Flashback (No 5) at [43]-[53].

8                     It is necessary then to revisit some of the circumstances revealed in Flashback (No 5).  The key elements were as follows:

(a)        Showtime and Mr Leslie were ordered to give discovery by 18 January 2009.

(b)        Discovery was not given by that date.

(c)        There was a directions hearing on 11 March 2009 at which the failure to give discovery was the subject of submissions.

(d)       I was informed that the list of documents had been prepared and that only a failure by counsel for Flashback to sign a confidentiality undertaking was holding matters up.

(e)        Since this provided no reason for not giving discovery to Flashback’s solicitors (who had executed a confidentiality undertaking) I ordered the provision of the list within five days:  Flashback Pty Ltd v Showtime DVD Holdings Pty Ltd (No 3) [2009] FCA 308.  As is apparent from that judgment, I regarded the proffered reason as to why discovery had not been given as unsatisfactory.  In view of that I made an order that if discovery was not given within five days the defences of Mr Leslie and Showtime should be struck out and judgment given against them.  In taking that course, as I explained in Flashback (No 5) at [28], I had before me sworn evidence from Mr Leslie’s solicitor that the list of documents had, in fact, been prepared.

(f)        This was in fact untrue.  Sworn evidence prepared by Mr Leslie revealed that no steps were taken to prepare the list of documents until after the making of the self-executing orders: Flashback (No 5) at [33];

(g)        Even after the making of the orders Showtime and Mr Leslie did not search for any documents apart from those which assisted their own cases:  Flashback (No 5) at [35].

(h)        At the time of the hearing of Flashback (No 5) no attempt was made to furnish any further discovery or to explain why the first and third respondents had placed before the Court at an earlier time sworn evidence that the list of documents was ready when, apparently, it was not. 

9                     In those circumstances, I declined to set aside the earlier self-executing orders.  The consequence was that Mr Leslie and Showtime’s defences remained struck-out with judgment entered against them. 

10                  This chain of events involved a failure on Mr Leslie and Showtime’s part to grasp the significance of compliance with discovery orders.  Even after their defences had been struck out it is apparent that this was not understood because even then the problem persisted.  The evidence in Flashback (No 5) suggested, and I accepted, that the failure to give discovery had resulted from a policy of seeking to save costs rather than a desire to frustrate the due process of the law.  But it remained nevertheless a deliberate decision not to obey Court orders and, worse, it has at all times remained uncured.  At paragraph [43] in Flashback (No 5) I put it this way:

Showtime and Mr Leslie submit that the failure to comply with the orders was neither wilful nor contumelious.  I do not think that it was wilful in the sense that an effort has been made deliberately to suppress discovered documents.  However, I do think it shows a degree of nonchalance towards this Court’s orders that travels well into the realm of reckless indifference.  The material to which I have referred shows, I think, that Showtime and Mr Leslie have failed to comply with the orders through a combination of disobedience and ignorance; ignorance because Mr Chelvathurai appears not to have explained the obligations arising from the orders to Mr Leslie properly or at all; disobedience because of Mr Leslie’s decision not to comply with the orders to conserve costs.  The desire, however, to reduce costs – admirable in other contexts – is no excuse for a wilful failure to comply with a court order.  At all times after 18 January 2009 the decision not to give discovery to curtail costs was disobedient. 

11                  The circumstances which lead Flashback to apply in Flashback (No 4) for a determination that the self-executing orders had taken effect were ones involving unacceptable conduct in litigation by Showtime and Mr Leslie.  Further, I do not think that any different quality is to be ascribed to the conduct of the application made in Flashback (No 5).   The first element in that application – simply repeating that which had been said and rejected in Flashback (No 4) – should not have been made because there had been no change in any relevant circumstance.  Further, even taking the most favourable view of the application, it did not address the fundamental and ongoing problem that discovery even at that late stage had yet to be given.

12                  The second element – seeking to show that the self-executing orders should not have been made – was a doomed affair unless and until Showtime and Mr Leslie gave full discovery.  It was only by making a clean breast of that issue that one could begin to discuss whether the original orders should be revoked.  There appeared to be no comprehension of that difficulty on Showtime’s or Mr Leslie’s part. 

13                  In those circumstances, the conduct of  Mr Leslie which led to the judgments in Flashback (No 4) and Flashback (No 5) involved irresponsible behaviour in litigation.

14                  That conduct is appropriately described as sufficiently unreasonable to make it unjust for the other party to be limited in its rights to recover costs on a party/party basis: Dowling v Fairfax Media Publications Pty Ltd (No 2) [2010] FCAFC 28 at [41] per Graham J and [140] per Logan and Flick JJ.  In those circumstances, the appropriate order is that Mr Leslie should pay Flashback’s costs of Flashback (No 4) and Flashback (No 5) on an indemnity basis.  I do not overlook the fact that I made an order in Flashback (No 5) for party/party costs and that those costs have now been taxed.  The question of indemnity costs was not argued at that time.  The fact that a prior order has been made is no bar to the making of a further indemnity costs order on application: cf. Sagacious Legal Pty Ltd v Wesfarmers General Insurance Ltd (No 5) [2010] FCA 630 at [1] per Rares J.  Nor do I think that the fact that it has been taxed makes any real difference, at least in this case.  To the extent necessary the taxing officer may revoke the prior certificate. 

The offer of 8 June 2010

15                  After judgment was entered against Mr Leslie and Showtime there remained the question of damages. That question was listed for hearing on 15-16 June 2010. On 8 June 2010 Flashback’s solicitors wrote to Mr Leslie’s solicitors in these terms:

We refer to the abovementioned proceedings and in particular, to the hearing in Sydney on 15 and 16 June 2010. We note that your client and his legal representatives have been ordered to appear in person on that date.

We write to make an offer of settlement of the matters in dispute between our clients as follows:

1.         Your client pay our client $131,407.80 in cleared funds on or before 15 June 2010.  This amount equates to 70% of our client’s professional costs (excl. GST) and 70% of disbursements incurred in the proceedings.

2.         Our client will forfeit its entitlement to damages.

3.         Upon receipt of the abovementioned amount, the parties will immediately take all steps necessary to discontinue Federal Court proceedings NSD 680 of 2008 with no order as to costs.

This offer is not strictly made in accordance with the requirements of Order 23 of the Federal Court Rules because it is not intended that this offer be open for a period of 14 days.  However, in the event that your client does not accept this offer, we have instructions to produce this letter to the Court on the question of costs.

Our client’s willingness to settle the proceedings as set out above represents a genuine compromise of its position.  Accordingly, we invite your client to carefully reconsider its position.

The offer contained in this letter will remain open for acceptance until 9am on Tuesday, 15 June 2010.

16                  8 June 2010 was a Tuesday.  The following Monday, 14 June 2010, was the Queen’s birthday weekend and this was a public holiday.  There were therefore only three working days between the date of the offer and the date of the hearing.  It was probably possible to give notice of acceptance of the offer over the long weekend but the more critical issue was the letter’s requirement that the sum of $131,407.80 in cleared funds be handed over before the commencement of the hearing on Tuesday 15 June 2010.

17                  On Thursday 10 June 2010 the solicitors for Mr Leslie wrote back rejecting the offer.  It was in these terms:

We refer to the above matter and your letter dated 8 June 2010 in particular.

We have now received our client’s instructions on your client’s offer to compromise these proceedings. 

Please note that our client does not accept the offer.  It is our client’s contention that these proceedings were unnecessarily instituted, bearing in mind that our client too had a validly executed licensing agreement with Absolute Home Entertainment and Mr Jason Campbell.

We now note from Mr Hume’s affidavit duly sworn and filed on the 4^th of June 2010 that Mr Rehmie will not be attending Court for the damages proceedings.  We object to Mr Rehmie not attending the damages proceedings as Mr Rehmie had sworn to numerous affidavits, which as it turns out now was not entirely correct.  Yet due to those affidavits, significant interlocutory proceedings were instituted by your client which has caused our client pecuniary losses as well as destroyed our client’s business.

We also note that the trial dates for the damages hearing was set last year in August 2009, and your client’s legal representatives knew that Mr Rehmie will [sic] not be attending as Mr Hume says in his affidavit that Mr Rehmie’s holidays were planned well in advance of the court date when the hearing dates were set.

We further note that the attachments to Mr Hume’s affidavit has yet to be served on us and we are unable to consider appropriately Mr Hume’s statements in his affidavit.

Please take note that it is our instructions to defend this matter most vigorously and your client will be put to strict proof regarding all mattes raised in its claim as to title and all statutory requirements under the Copyright Act 1968.

It is also our client’s instructions to claim for costs from your client for all his legal costs incurred thus far. However in the interest of appropriate case management and minimising the Court’s time on this case, our client will agree to waive any claim for costs provided your client:

1.         withdraw the proceedings;

2.         does not claim any damages;

3.         agrees to each party bearing their own costs.

If your client consents to these conditions, our client will then consent to the proceedings being dismissed.

Please note that it [is] our intention to produce this letter in Court on the question of costs when the same arises.

18                  The making of an offer to settle a proceeding and the refusal of the party receiving that offer can be relevant to the question of costs.  The critical question is always whether the party declining the offer has acted in such a way as to require a departure from the ordinary costs rule.  In answering that question it has been found to be of utility to gauge the offeree’s conduct in refusing the offer by reference to standards of reasonableness.  Where the conduct of the offeree in refusing the offer is sufficiently unreasonable to place it in the company of other unacceptable postures in litigation – such as the making of allegations of fraud known to be false, the pursuit of proceedings for ulterior motives, wilfully disregarding known facts or law, or the making of otherwise groundless allegations – then this may warrant the making of an indemnity costs order: Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 at 233 per Sheppard J.  There is nothing special about the making of an indemnity costs order in those circumstances: it is inflicted because of unreasonable behaviour by a litigant and the indemnity costs order follows just as it does in any other case of unreasonable behaviour.  Thus, and perhaps contrary to the understanding in some quarters, the making of an offer which is reasonable by no means ensures the subsequent making of an indemnity costs order should it be declined and the suit less favourably concluded.  So much follows from the truth that some reasonable offers may be reasonably declined.

19                  I do not think that Mr Leslie’s conduct in declining Flashback’s offer of 8 June 2010 was such an imprudent act that he is to be placed in the same company as those who make baseless allegations of fraud or pursue proceedings for ulterior motives.  I accept, in Flashback’s favour, that it was unlikely that Mr Leslie was going to do much better than what was on offer.  Judgment had been entered against him and the question now was how much was he going to have to pay in damages?  In those circumstances, the offer by Flashback to forego all of its entitlements to damages was hard to better, particularly since it was at least going to receive nominal damages. 

20                  The offer by Flashback to accept 70 per cent of its costs, put at $131,407.80, is a little more problematic.  Mr Leslie had in his favour a costs order against Flashback from Flashback (No 1) and there had been, at least at that stage, no order as to costs in Flashback (No 4).  The offer to accept 70 per cent of its costs therefore involved no element of compromise on Flashback’s part since the 70 per cent figure, of course, reflected the popular wisdom that it is about that proportion of actual costs which is recovered upon taxation.  The costs offer therefore assumed an entitlement to all of Flashback’s costs.  Although there were various ways in which the costs question might ultimately be determined – including the making of an indemnity costs order for Flashback (No 4) and Flashback (No 5) – none of that was certain.  In those circumstances, I do not think that it was unreasonable for Mr Leslie to decline the costs aspect of the offer. 

21                  The offer which was made was, however, a single offer with two elements one relating to damages the other to costs.  Whilst the costs element by itself could reasonably have been declined it has to be seen in context which includes the offer being part of an overall offer not to receive any damages.  To my mind, that made the total offer an attractive one from Mr Leslie’s perspective.  It would have been wise for him to have accepted it. 

22                  The difficulty, I think, is the timeframe.  Mr Leslie was left with three working days to obtain advice on the reasonableness of the offer, to raise – should it be suggested that he should accept the offer – the sum of $131,407.80 in cash and, all the while, have his lawyers and himself travel from Perth to Sydney to conduct the hearing and to prepare therefor.  There are, no doubt, cases where Calderbank offers can be made close to a trial.   In this case, however, the closeness of the trial and the need for practitioners to travel interstate were likely to present real impediments to the consideration of the offer.  Those difficulties are augmented by the very short time-frame provided for the payment.   In those circumstances, I do not think that the refusal of Mr Leslie to accept the offer can be described as being unreasonable.  The appropriate order is, therefore, that he pay the costs of the damages part of the case on the ordinary basis. 

23                  I turn them to Flashback’s argument that Mr Leslie should pay the costs of the entire proceedings on an indemnity basis.  Apart from the circumstances giving rise to Flashback (No 4) and (No 5) I do not see any real basis for that contention.  Showtime and Mr Leslie were, in fact, successful in Flashback (No 1) in requiring Flashback to join the owner of the copyright.  Apart from the defaults associated with discovery there does not seem to be any particular conduct warranting a departure from the ordinary approach.

24                  Because Flashback recovered less than $100,000 the provisions of O 62 r 36A apply.  It provides:

(1)        When a party is awarded judgment for less than $100,000 on a claim (not including a cross-claim) for a money sum or damages any costs ordered to be paid, including disbursements, will be reduced by one-third of the amount otherwise allowable under this Order unless the Court or a Judge otherwise orders.

25                  It is true that this claim could, theoretically, have been brought in the Federal Magistrates Court.  This is because s 131D of the Copyright Act 1968 (Cth) gives that Court jurisdiction in civil proceedings arising under that Act which would have included this case.  However, the complexity of copyright proceedings is such that the general position has been that claims under it are properly commenced in this Court.  The current case involved the question of the joinder of the foreign copyright owner, injunctive relief, an account of profits and infringement.  To my mind it would have been unrealistic to have expected such a case to be conducted before the Federal Magistrates Court.  That conclusion is consistent with a line of cases which confirm the appropriateness of this Court as a venue for copyright disputes: see the authorities collected by Besanko J in Futuretronics.com.au Pty Ltd v Graphix Labels Pty Ltd (No 3) [2008] FCA 896 at [11]-[13].  In those circumstances it is appropriate to make an order that O 62 r 36A(1) does not apply to these proceedings. 

26                  So far as the present costs application is concerned, both parties have had a measure of success and each party should bear its own costs.

27                  The orders I make are:

1.         Mr Leslie is to pay Flashback’s costs of Flashback (No 4) and (No 5) on an indemnity basis.

2.         Each party bear its own costs of the costs application.

3.         Mr Leslie is otherwise to pay Flashback’s costs of the proceedings.

4.         Order 62 r 36A(1) Federal Court Rules does not apply to these proceedings. 

Associate:

Dated:         25 August 2010