FEDERAL COURT OF AUSTRALIA

Seven Network Limited v Commissioner of Taxation (No 2) [2015] FCA 201

THE COURT ORDERS THAT:

1.    The respondent pay the applicant’s costs up to 10:00am on 31 October 2013 on the ordinary basis.

2.    The respondent pay the applicant’s costs after 10:00am on 31 October 2013 on an indemnity basis.

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

REASONS FOR JUDGMENT

1    On 22 December 2014 I made orders that Seven Network Limited’s (Seven) appeal against The Commissioner of Taxation’s (Commissioner) Notice of Decision, in relation to three penalty notices issued to Seven, be allowed (Seven Network Limited v Commissioner of Taxation [2014] FCA 1411 (the Decision)). I do not propose to repeat the factual background to the litigation which is set out in the Decision. As a result, Seven was not held liable for withholding tax on payments made by it for the provision of a signal, the ITVR Signal, for use in connection with live Australian broadcasting during the Olympic Games. I reserved the question of costs, at the request of the parties.

2    Seven now seeks an order that it be paid ordinary costs up to 10:00am on 31 October 2013, when the hearing commenced, and indemnity costs thereafter. It relies on the general discretion of the Court as to costs pursuant to s 43 of the Federal Court of Australia Act 1976 (Cth).

3    There is no dispute that Seven is entitled to an order for costs. The Commissioner accepts that Seven should have costs on the ordinary basis. The basis of the claim to indemnity costs arises from the Commissioner’s rejection of a Calderbank offer (an offer made in accordance with the principles set out in Calderbank v Calderbank [1975] 3 All ER 333) made on 29 October 2013, which expired at 10:00am on 31 October 2013. The Commissioner contends that Seven has not established that such rejection was unreasonable.

CHRONOLOGY

4    It is necessary to understand certain events and the context in which they took place:

    Between 6 June 2007 and 23 December 2009, the Commissioner issued three penalty notices. Seven lodged objections to the three penalty notices.

    On 2 December 2011, the Commissioner issued a Notice of Objection decision on Seven’s objections, refusing to remit in whole or in part the penalties (Objection Decision).

    On 30 January 2012 and 31 January 2012, Seven filed its Notice of Appeal against the Objection Decision and an Originating Application and Statement of Claim respectively.

    On 30 July 2013, a Joint Statement of Experts was filed in the proceedings.

    On 16 October 2013, the parties agreed on a Statement of Agreed Facts.

    On 28 October 2013, the parties attended what can be described as a settlement meeting. At that meeting, each party presented a settlement offer. Each of those offers was rejected.

    On 29 October 2013, Clayton Utz as solicitors for Seven sent a letter (the Calderbank Letter) setting out the terms of Seven’s offer of settlement, in the same terms as those presented the previous day. The letter stated that a response was required by 10:00am on 31 October 2013. The offer was, in effect and relevantly, that Seven would recover approximately 70% of moneys paid to the Commissioner and pay all of its own costs.

    On 30 October 2013, the Australian Government Solicitor for the Commissioner sent a letter to Clayton Utz (the Commissioner’s Calderbank Letter) in which it refused Seven’s offer and set out a counter-offer, in effect and relevantly, that the Commissioner would retain the moneys paid to the Commissioner but permit Seven certain tax deductions and pay all of his own costs. For the purposes of this application, the parties accept that the effect of this offer was that Seven would obtain an equivalent to approximately 30% of the moneys paid to the Commissioner.

    On 31 October 2013, the hearing commenced.

5    There are a number of events cited by the parties that took place since proceedings were commenced that are not, in my view, of direct relevance to the present issue. They include:

    In 2008, Seven provided the Commissioner with an opinion from Senior Counsel to the effect that Seven would be successful.

    In 2010, the Commissioner obtained advice from Senior Counsel to the effect that, inter alia, that the Olympic Broadcasting Committee had made a cinematograph film which was transmitted to Seven or, in the alternative, that the right to use the visual images and sounds was a right to use “other like property” within the meaning of the Swiss Treaty such that Seven was liable to withholding tax.

THE COMMISSIONER’S SUBMISSIONS

6    It is not in contention that the question to be addressed is the reasonableness of the Commissioner in refusing Seven’s offer. If that refusal was unreasonable, Seven will be entitled to indemnity costs. As explained in CGU Insurance Limited v Corrections Corporation of Australia Staff Superannuation Pty Ltd [2008] FCAFC 173 at [75], that is to be assessed by reference to the circumstances facing the Commissioner at the time of the offer and not with the wisdom of hindsight.

7    The Commissioner emphasises that the fact that a person who rejects a Calderbank offer ultimately obtains a less favourable result at trial is a necessary but not sufficient condition for indemnity costs and that Seven must establish that his conduct was unreasonable (CGU Insurance at [75]; Taleb v GM Holden Limited (2011) 286 ALR 309 at [49]).

8    The Commissioner relies on the following:

    Seven’s offer was made 48 hours prior to the commencement of the hearing and some seven and a half years after litigation had commenced.

    He had Senior Counsel’s advice that his case was “arguable”.

    The litigation involved novel issues of copyright law.

    It was in the public interest that the case be heard and determined, in particular because there was another case on similar facts waiting for determination.

    The offer was not clear, in that there was no quantification of the costs that formed that part of the offer relating to Seven paying its own costs.

9    It does not seem to be in dispute that the fact that the written offer repeated the oral offer made in the settlement conference was understood as a Calderbank offer, which foreshadowed an application for indemnity costs in the event of Seven’s success in the proceedings.

The timing of the offer

10    It is the case that the offer was made immediately prior to the hearing and that one of the objectives in promoting offers of settlement is to encourage early settlements. However, the Statement of Agreed Facts had only recently been settled. That statement, in the context of a case involving reasonably complex questions of the characterisation of the technology, formed part of the foundation for an analysis of the questions of copyright. While there were some outstanding objections to evidence, they were not of great moment and generally related to Seven’s preparedness to permit the Commissioner to read evidence that Seven objected to, if read on certain bases.

11    There is no evidence that the Commissioner had any difficulty in considering the offer in the available time. Seven restated an offer that had, as explained by the Commissioner’s solicitor in his affidavit of 2 March 2015, already been ‘fully considered… and rejected’. Further, the Commissioner immediately restated his own counter-offer in the Commissioner’s Calderbank Letter, which offer was said to expire on 30 October 2013, later in the day that it was sent.

12    The timing of Seven’s offer does not affect the reasonableness of the Commissioner’s decision.

Senior Counsel’s advice

13    Seven took a position as to the outcome of the case that was reflected in written advice from Senior Counsel that it had supplied to the Commissioner. That position, based on legal principle, did not change.

14    During the settlement conference, in private session, the Commissioner’s Senior Counsel said to those representing the Commissioner words to the effect:

Seven’s view overstates their prospects of success. The Commissioner’s case is arguable, but this is a test case that could go either way.

15    The Commissioner submits that, because he had advice that his case was arguable, it was not unreasonable to reject Seven’s offer.

16    The existence of this advice does not, of itself, negate unreasonableness. First, if a case is not arguable, it would not be advanced by counsel. That applies to all litigation. Put another way, it is not sufficient to avoid the consequences of a Calderbank letter that counsel, even Senior Counsel, advised that the case is arguable.

17    In making the determination of unreasonableness, the parties’ understanding of the strengths and weaknesses of their respective cases can be relevant considerations (Taleb at [49]). The advice that the Commissioner’s case was arguable was qualified by the recognition that the outcome was uncertain. If the case was arguable but could go either way, a reasonable counter-offer might have been of the order of 50 per cent of the retained moneys. Instead, the Commissioner, in rejecting Seven’s offer, offered only 30 per cent.

18    The circumstances of that counter-offer do not support reasonableness in rejecting Seven’s offer. Indeed, they suggest a position not consistent with counsel’s advice.

Novel issues of copyright law and the public interest

19    In Federal Commissioner of Taxation v Clark and Another (No 2) [2011] FCAFC 140 at [28], the Full Court said:

Once the Court’s jurisdiction is engaged the Commissioner becomes a litigant, subject to s 64 of the Judiciary Act, the provisions of the Federal Court Act and the Rules. His conduct is to be judged by reference to all circumstances including, in an appropriate case, his policies and procedures.

20    It follows that a decision to refuse an offer so that, in the public interest, a case is heard and determined, does not of itself make the refusal reasonable. It is necessary to look to all of the circumstances.

21    The Commissioner’s determination to obtain a decision from the Court did not extend to failing to make a counter-offer. If that had been accepted by Seven, there would not have been a hearing. This suggests that the public interest factor was not determinative of the Commissioner’s decision. Apart from a single other case on the same facts awaiting the Decision, the Commissioner points to the importance of the case to principles of copyright law. It has not been explained why the Commissioner has an interest in oversight of that law but, again, the Commissioner was prepared to forego the hearing if an advantageous settlement could be attained.

22    Further, if it were simply a matter of public interest that the matter be determined, it does not seem reasonable that Seven, as a private party, should bear the cost of the continuing litigation if it could have been settled in accordance with its offer. The Commissioner did not offer to pay any of Seven’s costs of the “test case” after Seven’s offer.

Each party to bear its own costs

23    The Commissioner says that he was entitled to know the value to Seven of its offer to pay its own costs.

24    I confess that I do not fully comprehend this submission. First, the Commissioner did not ask Seven to quantify its costs, either in the settlement meeting or after receipt of the Calderbank Letter. Secondly, the Commissioner would have known that Seven would have incurred significant legal costs over the seven and a half years since the dispute arose and that Seven had retained two Senior Counsel to appear at the hearing. Thirdly, if that matter were of such importance in the context of an offer, it is noteworthy that the Commissioner made his own offer in similar terms, to pay his own costs.

CONCLUSION

25    The outcome of the case, in Seven’s favour, is not determinative of its entitlement to indemnity costs upon the serving of the Calderbank Letter but it is a factor and the condition precedent to the entitlement. The question is whether the Commissioner’s refusal was, in the circumstances, unreasonable. In my view, it can be said that it was. None of the bases advanced by the Commissioner support the reasonableness of his refusal, for the reasons outlined above.

26    Seven made an offer by way of the Calderbank Letter which was refused. In the circumstances of the offer, the Commissioner’s refusal to accept it was unreasonable. Seven obtained a more favourable outcome of the proceedings and Seven is entitled to indemnity costs after the date of expiry of its offer.

Associate:

Dated:    13 March 2015