FEDERAL COURT OF AUSTRALIA

Metz Holdings Pty Ltd v Simmac Pty Ltd (No 3) [2011] FCA 1450

THE COURT ORDERS THAT:

1.    The first and second respondents pay the applicants’ costs of the proceedings, including reserved costs, on a party and party basis until 23 February 2011 and thereafter on an indemnity basis.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011

REASONS FOR JUDGMENT

APPLICATION FOR INDEMNITY COSTS

1    This is a proceeding in which the applicants principally alleged that representations made in the course of negotiations and prior to settlement of the sale of a wholesale lighting business known as Illumination Services WA by the respondents to the applicants, were misleading or deceptive contrary to s 52 of the Trade Practices Act 1974 (Cth) (TP Act) and/ or s 10 of the Fair Trading Act 1987 (WA) (FT Act).

2    On 25 August 2011 the Court delivered its primary decision in Metz Holdings Pty Ltd v Simmac Pty Ltd (No 2) [2011] FCA 981, at which time an order was made that the applicants bring forward a minute of proposed final orders designed to carry forward the orders as proposed in the decision. The matter was listed for further hearing on 31 August 2011 for final orders and consideration of costs of the proceedings.

3    During the hearing on 31 August 2011, Counsel for the applicants made an application for indemnity costs pursuant to O 23 r 11(4) of the then Federal Court Rules 1976. The applicants relied on an outline of submissions (undated) handed up to the Court that day, as well as an affidavit of Maria Gabriella Di Martino, solicitor for the applicants, sworn 24 August 2011.

4    At the conclusion of the hearing the Court made the following orders:

1.    Pursuant to section 87(2)(a) of the Trade Practices Act 1974 (Cth) each of:

(a)    the sale agreement between the first respondent and the first applicants in respect of the business Illumination Services WA that was made on 7 May 2008;

(b)    the employment agreement between the first applicants and the second respondent that was made on 24 June 2008; and

(c)    the lease of Unit 9, 3 King Edward Road, Osborne Park, Western Australia granted by the fourth respondent to the first applicants on 5 July 2008.

are declared to be void ab initio.

2.    The first and second respondents do pay the amounts ordered under Orders 4 to 6 of this Order on or before 28 September 2011.

3.    Upon payment in full of the amounts under Order 2 above the first applicants shall return to the first respondent the assets comprising the business of Illumination Services WA, and shall sign all documents necessary and do all things necessary to effect a transfer of the business name and assets comprising the business to the first respondent.

4.    The first and second respondents do pay to the first applicants the sum of $634,137.80 of which the sum of $102,686.00 shall be paid by the first and second respondents in to Court pending a determination by the Court whether the whole of the sum or any lesser sum is payable on account of taxation liabilities to be incurred by the applicants on profits for the period from 1 July 2008 to 30 June 2011.

5.    The first and second respondents do further pay to the first applicants the value of the stock held at the business on the date on which the assets comprising the business are returned to the first respondent pursuant to Order 3 above, as valued at the first and second respondents’ cost, by a person qualified to make such valuation as the parties may agree, or failing such agreement within 10 days of the date of these Orders, as nominated by the chairman for the time being of the Real Estate Institute of Western Australia Inc.

6.    The first and second respondents do pay to the first applicants interest on the sum of $50,000.00 at the rate of 8.3% per annum from 4 July 2008 to the date referred to in Order 2 above.

7.    The first and second respondents do pay the applicants’ costs of the proceedings, including reserved costs, on a party and party basis until 23 February 2011 and thereafter on an indemnity basis.

5    These are the written reasons for granting indemnity costs as sought by the applicants.

cost ORDER SOUGHT BY THE applicants

6    The applicant sought indemnity costs on the basis that an offer was made to the first and second respondents (respondents) to settle the proceedings by way of letter dated 9 February 2011, in the following terms:

The applicants hereby offer to settle and compromise each and all claims the applicants and the Respondents have or may have against each other in the Proceedings (including each and all of the Respondents’ counterclaims) on the basis that the Respondents shall pay to the applicants:

1.    the sum of $420,000.00,

2.    interest on the sum of $420,000.00 calculated pursuant to section 51A of the Federal Court of Australia Act 1976 (Cth) from 7 July 2008 to the date of acceptance of this offer, and

3.    costs, to be taxed if not agreed by the parties,

within 28 days of acceptance of this offer.

7    The offer was made pursuant to O 23 of the Federal Court Rules, and the application for indemnity costs was made pursuant to O 23 r 11(4), which states:

If:

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

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

then, unless the Court otherwise orders, the applicant is entitled to an order against the respondent for costs incurred in respect of the claim:

(c)    up to an including the day the offer was made – taxed on a party and party basis; and

(d)    after that day – taxed on an indemnity basis.

8    The offer was formally rejected by the respondents’ solicitors by way of email sent 16 February 2011: see the affidavit of Ms Di Martino sworn 24 August 2011 at [5]-[6].

9    The respondents opposed the applicants’ application for indemnity costs, contending that the only appropriate orders for costs in the circumstances were:

    the first and second respondents pay 50% of the applicants’ costs of the action to be taxed or agreed; or

    the first and second respondents pay the costs of the applicants’ costs of the action to be taxed or agreed.

10    The respondents provided written submissions in support of those contentions dated 31 August 2011.

11    I note that although there are new Federal Court Rules currently in operation, the old rules apply by virtue of rule 1.04(1) of the new Federal Court Rules, as this was an action brought before 1 August 2011.

applicants’ SUBMISSIONS

12    The applicants in their written submissions contend that if the requirements of O 23 r 11(4) are satisfied, there must be “compelling and exceptional circumstances” before the Court would “otherwise order” indemnity costs. The applicants cited the comments of the Full Court of the Federal Court in Futuretronics.com.au Pty Ltd v Graphix Labels Pty Ltd [2009] FCAFC 40 (Futuretronics.com.au) at [10] in support of this submission:

In dealing with r 11(4), which also uses the expression appearing in r 11(6) – ‘unless the court otherwise orders’ – Hely J in Port Kembla Coal Terminal Ltd v Braverus Maritime Inc (No 2) (2004) 212 ALR 281 at [17], after referring to Heerey J’s observation in an earlier case that ‘compelling and exceptional circumstances’ must exist before the court would ‘otherwise order’, said:

Once an offer is made, and a judgment no less favourable obtained, a rebuttable presumption in favour of indemnity costs is created. It then becomes incumbent on the defendant to show reason why the presumption should not crystallise. Correctly understood, Heerey J was explaining the operation of the Rule, rather than impermissibly attempting to place a fetter on the exercise of the court’s discretion…[H]is Honour was not seeking to do more than to convey that the prima facie position should only be departed from for proper reasons which, in general, only arise in an exceptional case…

We agree with these remarks about r 11(4) which in our view are applicable to r 11(6).

13    The applicants further contend that the words “judgment on the claim to which the offer relates not less favourable than the terms of the offer” does not exclude from consideration relief sought other than money claims, and refer to the comments of Pincus JA, Davies JA and Mackenzie J in Timms v Clift [1998] 2 Qd R 100 (Timms v Clift) at 107:

Although the question considered in that case arose in a context different from the present, the line of reasoning is applicable here; the expression ‘a judgment no less favourable’ in r 118 does not in our opinion exclude from consideration relief sought other than money claims. For example, if an action was brought relating to the winding up of a partnership, various items of relief might be claimed, including declaratory relief; it would be a matter for the court’s judgment as to whether, an offer to settle having been made, the effect of the judgment overall was ‘no less favourable’ to the plaintiff than the offer.

14    The applicants relied also on the comments of the Full Court of the Supreme Court of Western Australia in Stambulich & Ors v Ekamper [2001] WASCA 283 at [97] per Malcolm CJ, Kennedy and Templeman JJ:

But in determining whether that criterion has been satisfied, the court may have regard to relief which the plaintiff has obtained which does not involve the payment of money: Timms v Clift [1998] 2 Qd R 100. The Court of Appeal there referred to a decision of the English Court of Appeal in Roache v News Group Newspapers Ltd [1992] TLR 551, where the plaintiff in a defamation action was awarded the very sum which had been paid into court. However, the plaintiff also obtained an injunction to restrain the publication. That being so, it was the plaintiff who emerged as ‘the substantial winner’. The defendant had ‘denied the plaintiff the prize which the plaintiff fought the action to win’.

15    The applicants submitted that the test is that articulated in Timms v Clift at 107, which is cited with approval in Sunlec International Ltd v Carroll Australasia Pty Ltd [2001] WASC 354 (Sunlec) at [15], as follows:

The Judge had to look closely at the facts of the particular case before him and ask: Who, as a matter of substance and reality had won? Had the plaintiff won anything of value or anything it could not have won without fighting the action through to a finish? Had the defendants substantially denied the plaintiff the prize which the plaintiff fought the action to win?

16    The applicants contend in their written submissions that as early as 20 May 2009 the applicants had claimed the sale agreement had been rescinded and had acted as caretakers, and that clearly, the “prize” sought has been rescission from the outset until completion of the trial.

17    The applicants submitted that rescission was granted to place them in the position they would have been in had they not entered into the impugned transaction, and refer to the following paragraphs of the primary judgment:

[874]     To order damages, but not to order rescission and reverse the transaction would, I consider, simply leave the applicants with a business which, while they have done their best to operate it successfully and would continue to do so, would continue to suffer from the stain of the original contraventions of the TP Act. That would constitute an unjust outcome that fails adequately to compensate the applicants for their loss. In the result, I do not consider that the first applicants can be adequately compensated for the loss they have suffered unless the Court orders rescission of the sale agreement and associated agreements.

…

[880]    Taking all these factors into consideration, rescission remains, in my estimation, the only fair and just means of ensuring that the first applicants are properly compensated for the undoubted loss they have suffered at the hands of the respondents.

18    The applicants referred also to the comments in Timms v Clift at 107 that it is “a matter for the court’s judgment as to whether, an offer to settle having been made, the effect of the judgment overall was “no less favourable” to the plaintiff than the offer”, and submitted that an offer to settle the claim for the relatively modest sum of $420,000, which offer if accepted would have saved the costs of the trial and intensive preparation preceding it, clearly would not have been adequate compensation based on the reasons at [873], [874] and [880] of the primary decision.

19    The applicants contend that, in the circumstances, there exists “no compelling and exceptional circumstances” to depart from the provisions of O 23 r 11(4), and no reason to deny the applicants the grant of indemnity costs which would truly place them in the position they ought to have been in had the impugned conduct not occurred. Furthermore, an order for indemnity costs would satisfy the criteria prescribed by O 23 r 11(4), as well as the purposes behind s 82 and s 87 of the TP Act.

respondents’ SUBMISSIONS

20    The respondents relied on the comments of Woodward J in Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd and others (1988) FCA 202; (1988) 81 ALR 397 (Fountain Selected Meats) at 401:

I believe that it is appropriate to consider awarding ‘solicitor and client’ or ‘indemnity’ costs, whenever it appears that an action has been commenced or continued in circumstances where the applicant, properly advised, should have known that he had no chance of success. In such cases the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts or the clearly established law. Such cases are, fortunately, rare. But when they occur, the court will need to consider how it should exercise its unfettered discretion.

21    The respondents contend that no basis for an award of indemnity costs exists by reason that:

    the offer of compromise expressly required the respondent’s counterclaim of $250,000 plus to be abandoned;

    the applicant was successful in its counterclaim to the effect that it was found at [831] of the primary decision that subject to the first applicant’s entitlement to relief against the first respondent, the first respondent was entitled to the payment of the unpaid $250,000 due under the sale agreement;

    accordingly the true effect of the offer of compromise, at the time it was made, was for the respondents to forego and effectively pay a total of $670,000 ($420,000 plus $250,000 on their counterclaim) which is nowhere near the ultimate flow of monies awarded to the applicants of $544,441.40; and

    the respondents were successful in defending some 15 of the 29 factual issues in dispute during the 10 day trial – such that it was not unreasonable for the respondents to proceed to trial and refuse the applicants’ offer: see Metz Holdings Pty Ltd v Simmac Pty Ltd (No 2) [2011] FCA 981 at [830].

22    Therefore, the respondents contend that by reason of the above, it cannot be said that the respondents had no chance of success in this action or otherwise defended it for an ‘ulterior motive’ – such that the applicants are entitled to costs on an indemnity basis.

CONSIDERATION

23    Counsel for the applicant submitted that O 23 r 11(4) created a statutory regime, and that the Court was required to make the assessment whether the offer received was more favourable or not, and if the offer was not more favourable and there was no good reason to otherwise order, indemnity costs ought to be awarded. Counsel for the respondent disagreed and submitted that the Court retains a general discretion for the award of indemnity costs made pursuant to O 23 r 11(4), and this is imported by the decision of Timms v Clift, on which the applicants rely.

24    Section 43 of the Federal Court of Australia Act 1976 (Cth) confers a broad discretion on the Court to award costs in proceedings such as these. The exercise of the discretion however is affected by Federal Court Rules such as O 23 r 11(4) as they applied at material times. The question then becomes how to approach an application such as the one before the Court which has been made pursuant to former O 23 r 11(4). I note the dicta of the Full Court in Futuretronics.com.au to the effect that once an offer is made, and a judgment no less favourable obtained, a rebuttable presumption in favour of indemnity costs is created. It then becomes incumbent on the defendant to show proper reasons why the presumption should not crystallise, and which in general only arise in an exceptional case. (It may be noted, in passing, that r 25.14 of the current rules appears to remove the discretion where an offer is refused and indemnity costs follow.)

25    It is not in dispute between the parties that an offer was made pursuant to O 23 r 11(4). The first question is whether a judgment no less favourable has been obtained by the applicants. This is a proceeding where the applicants have been awarded rescission of the sale of the lighting business, and the offer made to the respondents in February was by way of a sum of money, namely, $420,000. The respondents submitted that the true effect of the proposed compromise was of an amount much more than that, as the offer required the respondents to forego the $250,000 on their counterclaim, a counterclaim that the respondent was ultimately successful in obtaining on judgment. This aggregate sum of $670,000 is, the respondents submit, nowhere near the ultimate flow of monies awarded to the applicants of $544,441.40.

26    I consider it is reasonable to take these sums into account when assessing whether the judgment obtained was more favourable than the offer. However, this is a case in which rescission was ordered, and this is a remedy which I consider to be, on its face, considerably more favourable from the applicants’ point of view than the settlement proposed by the applicants. In this regard, I do not consider O 23 r 11(4) to be limited simply to the assessment of monetary claims. It is the substantive remedy or remedies given that matter.

27    The second question is whether proper reasons have been identified appropriate for the Court to make orders “otherwise than” an order for indemnity costs. Counsel for the respondents submitted that the respondents were successful in defending some 15 of the 29 issues in dispute such that it was not unreasonable for them to proceed to trial and refuse the applicants’ offer. However, even if this suggests some reasonable bases for rejecting the offer of the applicants, I do not consider this to be a sufficient proper reason to displace the prima facie operation of O 23 r 11(4).

28    The respondents rely on the authority of Fountain Selected Meats, which contains a discussion of when it is appropriate to consider awarding indemnity costs, for instance, in circumstances where an action is defended for an ulterior purpose. However, this was not a decision that involved an application for indemnity costs pursuant to O 23 r 11(4) of the Federal Court Rules 1976. Here, the respondents are required to demonstrate proper reasons for displacing the operation of the rule. I do not consider they have done so.

29    It is appropriate in the circumstances therefore to allow indemnity costs from the date of the offer. It seems to me, in all of the circumstances, that the result that the applicants have achieved here is plainly more favourable than the offer they proposed, even taking into account the $250,000 counterclaim which the respondents would have had to forego in accepting the offer. At the end of the day, O 23 r 11 provides a power incentive to parties to settle or be met with an indemnity costs order if they do not and cannot identify proper reasons for not doing so. There is an inherent risk which flows from a refusal of an offer to compromise and I consider that the respondents have not here demonstrated proper reasons sufficient to relieve the respondents from the adverse affects of O 23 r 11(4).

THE COURT ORDERS THAT:

1.    The first and second respondents pay the applicants’ costs of the proceedings, including reserved costs, on a party and party basis until 23 February 2011 and thereafter on an indemnity basis.

Associate:

Dated:    15 December 2011