FEDERAL COURT OF AUSTRALIA

Seafolly Pty Ltd v Madden (No 2) [2013] FCA 46

THE COURT ORDERS THAT:

1.     The Respondent’s application be dismissed.

2.    The Respondent pay the Applicant’s costs of the application.

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

REASONS FOR JUDGMENT

1    I gave judgment in this proceeding on 29 November 2012: see Seafolly Pty Ltd v Madden [2012] FCA 1346. I upheld certain of the claims made by the applicant (“Seafolly”) in its application and awarded costs against Ms Madden. I dismissed Ms Madden’s cross-claim and ordered that she pay Seafolly’s costs of that claim.

2    Ms Madden subsequently made application to vary the costs orders. She sought to substitute orders that Seafolly pay her costs of the proceeding from 14 October 2011 or that each party bear it or her own costs of the proceeding from that date or that the costs order in the principal application be limited to costs incurred by Seafolly in prosecuting the grounds on which it was successful.

3    The first two orders were sought in reliance on a Calderbank offer which Ms Madden had made on 14 October 2011: see Calderbank v Calderbank [1976] Fam Law 93. The third order was sought, in the alternative, on the basis that Ms Madden had been successful in resisting some of the grounds on which Seafolly had relied in its principal application.

4    Seafolly opposed the making of any of the variations sought by Ms Madden and further sought its costs on the variation application on an indemnity basis.

THE PARTIES’ CLAIMS

5    The principal proceeding arose out of certain public statements made by Ms Madden which suggested that Seafolly had copied and marketed some of her designs. In its amended statement of claim Seafolly pleaded causes of action for misleading and deceptive conduct, injurious falsehood and for copyright infringement.

6    Ms Madden cross-claimed against Seafolly. Her claims were for defamation and for misleading and deceptive conduct. Both her claims were founded on statements made in press releases by Seafolly which attributed to her a malicious intent of damaging Seafolly when she made her impugned statements.

THE OUTCOME OF THE PROCEEDING

7    Seafolly failed in its injurious falsehood and copyright infringement claims. It was successful in establishing that Ms Madden had engaged in misleading and deceptive conduct. The Court made declarations which identified Ms Madden’s contravening conduct. Injunctions were granted to restrain her from repeating such conduct and she was ordered to pay damages of $25,000 to Seafolly for injury to its reputation occasioned by her conduct.

8    Ms Madden’s cross-claims were dismissed.

MS MADDEN’S CALDERBANK OFFER

9    Ms Madden’s Calderbank offer proposed that the proceeding be compromised on the following terms:

    Ms Madden pay to Seafolly damages fixed at $30,000;

    Ms Madden pay Seafolly’s costs of its claims up to the date of the offer on a party-party basis which she estimated to be of the order of $86,000;

    Seafolly pay Ms Madden’s costs in relation to her cross-claim until 28 September 2011 on a party-party basis which she estimated to be in the order of $45,000;

    Ms Madden provide an undertaking to the Court that she would permanently refrain from engaging in the conduct which she had undertaken, on 8 September 2010, not to repeat; and

    Ms Madden withdrew her claims against Seafolly and Seafolly withdrew its claims against her.

10    This offer of compromise was rejected by Seafolly.

11    Ms Madden contended that Seafolly had not “in practical terms” achieved an outcome in the proceeding which was better than that which would have been secured had it accepted her offer. She further contended that it had been imprudent or unreasonable for Seafolly to reject her offer having regard to the circumstances which prevailed at the time at which the offer was made.

12    Those circumstances included the following:

    Although Seafolly was seeking large sums by way of damages under the Copyright act 1968 (Cth) (“the Copyright Act”), the Fair Trading Act 1989 (Qld) (“the Queensland Act”) and for the tort of injurious falsehood it was unable (as  remained the case at trial) to adduce evidence of any economic loss flowing to it from Ms Madden’s conduct;

    Damages were not available to Seafolly under the Queensland Act even if, as proved to be the case, it was able to establish that Ms Madden’s statements were apt to mislead and deceive;

    It was not until the commencement of the trial that Seafolly sought to amend its pleading to seek an award of damages under the Trade Practices Act 1974 (Cth) (“the TPA”);

    Ms Madden had agreed to the making of injunctive orders in substantially the same terms as were ultimately made by the Court;

    A party-party costs order was offered and such an order was made after trial; and

    Ms Madden had only sought a party-party costs order in her favour on the cross-claim up until the date on which Seafolly first pleaded defences to her cross-claim.

13    The Court’s power to award costs in proceedings is to be found in s 43 of the Federal Court of Australia Act 1976 (Cth). It is a broad and unfettered discretionary power which must be exercised judicially and in accordance with well established principles: see Alpine Hardwoods (Aust) Pty Ltd v Hardys Pty Ltd (No 2) (2002) 190 ALR 121 at 123. In Ruddock v Vadarlis (No 2) (2001) 115 FCR 229 at 234-5 Black CJ and French J dealt with the application of those principles:

“Within the general discretion of the courts to award costs it is accepted by decisions in both Australian and English jurisdictions that:

•    Ordinarily costs follow the event and a successful litigant receives costs in the absence of special circumstances justifying some other order.

•    Where a litigant has succeeded only upon a portion of the claim, the circumstances may make it reasonable that the litigant bear the expense of litigating that portion upon which he or she has failed.

•    A successful party who has failed on certain issues may not only be deprived of the costs of those issues but may be ordered as well to pay the other parties’ costs of them. In this sense “issue” does not mean a precise issue in the technical pleading sense but any disputed question of fact or law.

See Hughes v Western Australian Cricket Association (Inc) (1986) ATPR ¶40-748 at 48,136; approved by the Full Court in Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (1987) 17 FCR 211 at 222.

The award of costs to a successful party is principally by way of perceived restorative justice. The general rule assumes that where an applicant succeeds it will have incurred costs because the respondent’s conduct made it necessary for the applicant to bring the proceedings. If the applicant fails, the respondent will have incurred costs defending an action which ought not to have been brought against it. The order made in such cases is compensatory:

“If one thing is clear in the realm of costs, it is that, in criminal as well as civil proceedings, costs are not awarded by way of punishment of the unsuccessful party. They are compensatory in the sense that they are awarded to indemnify the successful party against the expense to which he or she has been put by reason of the legal proceedings: Cilli v Abbott (1981) 53 FLR 108 at 111.”

— Latoudis v Casey (1990) 170 CLR 534 per Mason CJ at 543; see to similar effect McHugh J at 567.”

14    A departure from the ordinary position that costs follow the event may be warranted where there has been an unreasonable rejection of a Calderbank offer. The departure may involve the award of indemnity costs to the offeror, or, as has been sought by Ms Madden, either an award of costs on the usual party-party basis in favour of the offeror or the making of no order for costs incurred on and after the date of the rejection: cf Perry v Comcare (2006) 150 FCR 319 at 335-6.

15    In Calderbank the Court of Appeal held that the successful party who had been awarded £10,000 should only have his costs up to the point at which he had rejected an offer from the other party which exceeded in value that which had been obtained by the order of the Court. Thereafter the unsuccessful party was to have her costs paid by the successful party.

16    The decision in Calderbank gave effect to the policy that the parties to litigation should seriously consider, and not lightly, reject offers made by another party with a view to compromising their dispute and avoiding a trial or the continuation of a trial: see Alpine Hardwoods at 125.

17    In later cases the Calderbank principle was developed. As a result of these developments the position now is that, depending on the circumstances of the case, an unreasonable refusal of a Calderbank offer may justify the award of costs on an indemnity basis from the date of rejection: see Black v Lipovac (1998) 217 ALR 386 at 432-3.

18    It is notable that, notwithstanding her reliance on these principles, Ms Madden has not sought that any varied costs order in her favour should be made on an indemnity basis. She seeks an order for her costs on a party-party basis from the date of the rejection of her offer.

19    Nor has she sought to rely on the provisions of Part 25 of the Federal Court Rules.

20    A first step in determining whether a rejection of a Calderbank offer is unreasonable requires a comparison between the offer made and the outcome obtained by the offeree at trial with a view to determining whether the offer, had it been accepted, would have placed the offeree in a more advantageous position than that which was secured by Court order.

21    When determining whether or not a Calderbank offer is more favourable to the offeree than the outcome achieved at trial, it is necessary to make a comparison between the offer made and the ultimate relief being sought “in all its aspects”: see Dr Martens v Figgins Holdings Pty Ltd (No 2) [2000] FCA 602 at [24].

22    In cases in which the relief sought by an applicant is confined to monetary damages and costs and the Calderbank offer is to pay a nominated sum plus costs, the determination of whether or not the offer was more favourable to the offeree than the outcome obtained will normally be a straight forward exercise. Where, however, the offer to pay a monetary amount is qualified by the inclusion of additional terms as part of a composite proposal it may be more difficult to form a judgment about the comparative advantages of the offer and the outcome.

23    Ms Madden made an offer to Seafolly that she would pay it $30,000 in damages plus costs on a party-party basis. Seafolly was awarded $25,000 by the Court. Had the terms of the offer been confined to the offer to pay damages and costs, she would have been in a strong position to argue for orders of the kind which she presently seeks.

24    Although Seafolly pursued damages claims against Ms Madden, this was, by no means, the only relief which it sought. As I recorded in the principal judgment at [153]:

“In bringing this proceeding, Seafolly was concerned not only to protect its corporate reputation. It was also concerned for the reputation of its employees; false allegations had been specifically made against Ms McLaren and there were implicit suggestions that the designers of Seafolly’s creations had not relied on their own ingenuity but had chosen instead to copy designs which had been created by Ms Madden.”

The declaratory relief which I granted served the purpose of vindicating the reputation of Seafolly and its employees: declarations were made that Seafolly had not copied Ms Madden’s garments, that the Seafolly garments were original designs which had been created by its employees and that underhanded means had not been employed to obtain photographs of Ms Madden’s garments in order that the designs might be copied.

25    While Ms Madden’s Calderbank offer provided for her to give an undertaking not to repeat the conduct about which Seafolly complained, it did not contemplate any public acknowledgement that her allegations were untrue and contravened provisions of the TPA. Furthermore, Seafolly would have been required to withdraw its claims against her. It would also have been required to pay some of Ms Madden’s costs of her cross-claim.

26    The proposed settlement terms were not to remain confidential. It would, therefore, have been open to Ms Madden, had the terms been agreed, to have subsequently asserted that Seafolly had withdrawn its claims against her and Seafolly would not have had the benefit of the favourable declarations which it obtained.

27    These considerations, standing alone, would, in my opinion, justify a finding that it was neither imprudent nor unreasonable for Seafolly to reject the offer made by Ms Madden. A comparison of the offer and the Court’s orders does not support her contention that Seafolly had “not, in practical terms, secured a result better than [her] offer”.

28    In making this finding I am not unmindful of the fact that, at the time at which Ms Madden’s offer was rejected, Seafolly was, I infer, unable to point to any economic loss which it had suffered as a result of Ms Madden’s conduct and was yet to amend its pleadings to make claims under the TPA.

29    Seafolly’s failure to adduce evidence that it suffered economic loss was fatal to its injurious falsehood claim. Its inability to establish that the photographer who, at the relevant time, held copyright in some of the photographs posted by Ms Madden had suffered any damage as a result of her publication of them was fatal to Seafolly’s copyright claims. Whilst these difficulties with its case should have caused Seafolly to give earnest consideration to any monetary offer made by Ms Madden, they would not reasonably have had a negative impact on Seafolly’s wish to obtain declaratory relief.

30    Seafolly was successful, at trial, in making good claims that Ms Madden had contravened ss 52 and 53(a) of the TPA. At the time at which the offer was made its pleadings did not refer to these causes of action. Nonetheless, there were equivalent provisions in the Queensland Act on which Seafolly did rely. Damages, however, were not one of the available remedies for contravention of the Queensland Act. Seafolly subsequently appreciated this deficiency in its case and made its claim under the TPA pursuant to which it was able to claim damages. This oversight (if it be one) related to Seafolly’s understanding of its legal rights at the time at which the offer was made. It was not a consideration which impinged on the prudence or reasonableness of its rejection of Ms Madden’s offer.

31    Ms Madden also stressed that Seafolly had sought damages against her totalling $2.25 million. This was the aggregate amount of four separate damages claims. Inevitably, there was the potential for double counting and, in opening Seafolly’s case, senior counsel acknowledged that, were Seafolly to be successful in making good all its causes of action, it would not have sought to obtain damages awards of this magnitude. More importantly, however, for present purposes, even if Seafolly over reached in its damages claims, this did not undermine the reasonableness or prudence of its decision to reject Ms Madden’s Calderbank offer.

32    I turn next to Ms Madden’s offer insofar as it deals with her cross-claim. Under her proposed terms she would have withdrawn her cross-claim and Seafolly would have paid her costs of that claim until 28 September 2011. In the event, Seafolly was wholly successful in resisting the cross-claim. Seafolly thus obtained at trial a result which was far more favourable to it than it would have obtained had it accepted the offer.

33    In these circumstances I do not consider that Seafolly’s refusal of Ms Madden’s settlement offer justifies an award of costs against it or an order that there be no order as to costs incurred following the rejection.

APPORTIONMENT

34    Ms Madden sought, in the alternative, a variation of the usual order as to costs which reflected her success in resisting Seafolly’s causes of action in injurious falsehood and under the Copyright Act.

35    It is well established that it may be appropriate to depart from the usual practice where an applicant has unsuccessfully pursued certain discrete issues but has nonetheless been successful on other grounds.

36    The parties were agreed that the exercise of the Court’s discretion, where apportionment of costs is sought, is to be guided by the approaches expounded in Roadshow Films v iiNet Limited (No 4) (2010) 269 ALR 606 at 610-3. In this part of his reasons Cowdroy J reviewed a large number of authorities which had considered the question. These authorities contained conflicting dicta and differing emphases. All, however, stressed the breadth of the unfettered discretionary power conferred on the Court by s 43 of the FCA Act.

37    Ms Madden relied particularly on certain passages which she submitted had been quoted with approval by Cowdroy J.

38    The first contained observations by a Full Court consisting of Gummow, French and Hill JJ in Dodds Family Investments Pty Ltd v Lane Industries Pty Ltd (1993) 26 IPR 261 at 271 where their Honours referred to the dictum of Fisher J in Trade Practices Commission v Nicholas Enterprises Pty Ltd (No 3) (1979) 28 ALR 201 at 208 that the discretion to apportion costs should only be exercised in the most exceptional circumstances. The Full Court went on to note that Fisher J had accepted that such exceptional circumstances may be found where considerable time at trial had been devoted to dealing with issues on which an otherwise successful party had failed. Their Honours said that:

“Nevertheless he accepted that where a considerable part of the trial is taken up in determining issues upon which a party fails, it is a proper exercise of the discretion to reduce the costs allowed to that party. Generally speaking, and notwithstanding the considerations referred to by Toohey J and the other authorities mentioned above, the demands of the community for greater economy and efficiency in the conduct of litigation may properly be reflected in a qualification of the presumption that the successful party is entitled to all its costs.”

39    The second passage was drawn from the reasons of Wilcox J in Commissioner of Australian Federal Police v Razzi (No 2) (1991) 30 FCR 64 at 69 in which his Honour said that:

“But I do not think that the courts should be reluctant to recognise the existence of exceptional cases. In these days of extensive court delays and high legal costs the courts should use all proper means to encourage parties to consider carefully what matters they will put in issue in their litigation. If parties come to realise that they will not necessarily recover the whole of their costs, even though they have successfully raised a discrete issue, they are likely better to consider whether the raising of that issue is a justifiable course to take.”

40    Having considered these and other authorities Cowdroy J concluded (at 613) that “[t]he current trend appears to favour apportionment in appropriate cases without such cases necessarily being classified as ‘exceptional’”. He had earlier cited, as an example of the circumstances in which apportionment might be appropriate, the statement of Jacobson J in Aristocrat Technologies Australia Pty Ltd v Global Gaming Supplies Pty Ltd (No 2) [2010] FCA 277 at [15] that “a party who seeks to run every issue in a case that could be conducted more economically takes the risk that it will have to bear the wasted costs but the same applies to an unsuccessful respondent.”

41    At the time at which I pronounced my earlier costs orders I did not consider that Seafolly’s mixed success warranted a departure from the usual order as to costs. I noted that Seafolly had been substantially successful in vindicating its reputation: see at [154]. I remain of this view.

42    As the authorities demonstrate apportionment may be appropriate where the pursuit by a party of discrete issues adds substantially to the length of a trial and to the other party’s costs of preparation for trial. This was not such a case. Each of the causes of action on which Seafolly relied were founded on substantially the same factual material. The reason Seafolly failed on two of those issues was the absence of evidence to establish that it suffered economic loss. No witnesses were called to give evidence which related exclusively to the issues on which Seafolly failed. The trial took no longer than it would have done had Seafolly not sought to pursue claims for injurious falsehood and under the Copyright Act.

43    In these circumstances I do not consider that, in the exercise of my discretion, a departure from the normal order is justified.

44    Having reached this conclusion, it is not necessary for me to deal with Seafolly’s further submission that the Court lacked power to vary the costs order which was made in November 2012 and subsequently entered. Seafolly accepted that the Court did have the power to vary its order once appraised of the existence of a Calderbank offer but contended that no proper basis existed for the recall of the order for the purpose of substituting an order which apportioned costs.

45    I would, however, note that, although Ms Madden did not seek to be heard on the costs issue when judgment was delivered, she had, in her outline of closing submissions, requested to be heard on costs.

46    Seafolly was, as a result, on notice that Ms Madden wished to be heard further on the question of costs once issues of liability had been determined.

COSTS OF THE APPLICATION

47    Seafolly submitted that, if I were to dismiss Ms Madden’s application for a variation of the costs order, she should be ordered to pay Seafolly’s costs of the application on an indemnity basis.

48    Seafolly argued that it was unreasonable for Ms Madden to pursue the application because it had no reasonable prospects of success. Upon being advised of the application Seafolly’s solicitors had provided Ms Madden’s solicitors with a detailed explanation of why the application was bound to fail and warned that, if Ms Madden persisted and was unsuccessful, indemnity costs would be sought.

49    Although the categories of cases in which indemnity costs may be awarded are not closed, it may be accepted that costs may be awarded on an indemnity basis if a party, properly advised, should have been aware that it had no prospect of pursuing successfully a particular application: cf Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397.

50    I do not consider that Ms Madden’s application was bound to fail. Her contentions relating to her Calderbank offer required a comparison between the offer and the outcome achieved by Seafolly at trial. The comparison involved and evaluative exercise in order to determine whether it could be said that, in a practical sense, Seafolly had failed to achieve a better result than it would have done had it accepted Ms Madden’s offer. Her position was by no means unarguable and her submissions, necessarily, could not have been put prior to delivery of my judgment.

51    Nor was Ms Madden’s argument relating to apportionment unarguable. The authorities have not produced any settled law and, ultimately, the decision rests on the exercise of the trial judge’s unfettered discretion.

52    Ms Madden should pay Seafolly’s costs of her application on the usual basis.

Associate:

Dated:    8 February 2013