FEDERAL COURT OF AUSTRALIA

Seafolly Pty Ltd v Madden (No 6) [2015] FCA 1369

THE COURT ORDERS THAT:

1.    Pursuant to r 40.02(b) of the Federal Court Rules 2011 (Cth), the respondent pay the applicant’s costs by way of a lump sum order fixed at $453,152.66.

2.    If the respondent wishes to submit that the usual order for costs should not be made on the applicant’s application for a lump sum costs order, she file and serve written submissions (not exceeding three pages) within 14 days of the date of these orders and the applicant file and serve any answering submissions (of no more than three pages) within a further seven days.

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

REASONS FOR JUDGMENT

1    This proceeding has a long history. That history is summarised in Seafolly Pty Ltd v Madden (No 5) [2014] FCA 1413 at [1]-[14]. In that decision, which was handed down on 23 December 2014, I ordered that Ms Madden pay 85% of the applicant’s (“Seafolly”) costs of the proceeding. At [51] I said that, given “the complexity of the issues which will arise in assessing costs …, an arguable case for the fixing of a lump sum must exist.” I adjourned an application by Seafolly for an order that a lump sum be awarded and said that the application by Seafolly could “be brought on for hearing on appropriate notice to Ms Madden”: see at [52].

2    Seafolly has since pursued its application and detailed written and oral submissions have since been made by both parties.

3    Specifically, Seafolly seeks the following orders:

“(a)    Pursuant to rule 40.02(b) of the Federal Court Rules 2011 (Cth) (2011 Rules), the costs payable by Ms Madden to Seafolly pursuant to the orders made … on 23 December 2014 be fixed at $325,655.00 in professional fees and $150,806.95 in disbursements being a total of $476,461.95.

(b)    Ms Madden pay Seafolly’s costs of and incidental to this application. Pursuant to rule 40.02(b) of the 2011 Rules, these costs be fixed at $14,866.56 in professional fees and $19,819.10 in disbursements being a total of $34,685.66.

(c)    Pursuant to Rule 40.32(3) of the 2011 Rules, interest accrues on the gross sum costs amounts detailed in paragraphs (a) and (b) above from the date that the orders setting out the orders referred to in paragraphs (a) and (b) are served on Ms Madden, calculated in accordance with rule 39.06 of the 2011 Rules.”

4    Ms Madden opposes the making of these orders.

THE LEGISLATION

5    Section 43 of the Federal Court of Australia Act 1976 (Cth) confers on the Court a broad and unfettered discretion to award costs in proceedings before it. That discretion must, of course, be exercised judicially.

6    Rule 40.02(b) of the Federal Court Rules 2011 (Cth) (“the Rules”) provides that a party who is entitled to costs may apply to the Court for an order that costs “be awarded in a lump sum, instead of, or in addition to, any taxed costs …”. Prior to the commencement of the Rules, Order 62.04(2)(c) provided for the Court to order that costs be paid in a ‘gross sum’.

EVIDENCE

7    Seafolly relied on three affidavits, sworn by a costs consultant, Ms Jennifer Young, and on two affidavits sworn by a partner in the firm of solicitors which had acted for it – Mr Anthony Watson.

8    Ms Madden relied on evidence from another costs consultant, Mr Graeme Arnold.

9    The evidence disclosed a measure of agreement. It was accepted on all sides that, were the matter to proceed to a contested taxation, a good deal of time would be consumed and expense incurred. Furthermore the process would take many months.

10    Ms Young estimated that it would cost both parties about $118,000 if taxation was required. That amount would be made up of professional charges to prepare the bill, preparing the file for taxation, appearances before a Registrar over about six days and dealing with any list of objections.

11    Mr Arnold contested Ms Young’s estimate. He suggested a figure of $68,900. The major difference between the two estimates was that Mr Arnold based his estimates on a taxation hearing taking only three days. He accepted that the cost of preparing a bill in taxable form would be “considerable” but he did not consider that this necessarily provided a reason for the making of a lump sum costs order. His view was that, in the circumstances of the present case, the making of such an order was not the “only realistic way” to proceed.

12    There was substantial disagreement between the deponents as to the quantum of any lump sum order which the Court might be minded to make.

13    Ms Young provided a series of reports. Her most recent report, dated 1 February 2015, took account of Seafolly’s costs and disbursements up to December 2014.

14    Ms Young estimated Seafolly’s actual costs and disbursements at $761,601.10. On a party/party basis its costs and disbursements totalled $560,543.48. Eighty-five percent of this sum was the $476,461.95 sought by Seafolly by way of a lump sum costs order. Seafolly calculated that this amount represented 73.6% of the actual costs and disbursements incurred by it. This, it submitted, was “well within the scope of lump sum costs awards granted by the Court for party/party costs in other proceedings.”

15    Mr Arnold had provided a report in March 2013. In that report he had estimated Seafolly’s party/party costs and disbursements, up to March 2013, to be $439,051.58. This figure was about 67% of the actual costs incurred by Seafolly up until that time. To this figure Mr Arnold applied a discount of 20%. He sought to justify this discount on the basis that it would “allow for uncertainties associated with the process”. He noted that Ms Young’s estimates had not incorporated any discount for “uncertainties”. He referred to a number of decisions of the Court in which, he said, that discounts had been applied. They were:

    Sparnon v Apand Pty Ltd [1998] FCA 164 (15%);

    Nine Films & Television Pty Ltd v Ninox Television Limited [2006] FCA 1046 (23%);

    Beach Petroleum NL v Johnson (No 2) (1995) 57 FCR 119 (39%); and

    Sony Entertainment v Smith (2005) 215 ALR 788 (60% on actual; 32% on party/party).

His proposed discount of 20% was, therefore, towards the lower end of the range established by these cases. Once the 20% discount was applied the resultant figure of $351,241.26 represented 53% of the actual costs incurred by Seafolly up until March 2013.

16    Mr Arnold then contemplated a further reduction. He noted that Seafolly had only been awarded $25,000 by way of damages. This, he said, meant that there should be “an automatic one-third off reduction to costs … unless the Court otherwise orders.” He elaborated as follows:

“… if the (apparently) compulsory one-third reduction is applied due to 0 62 r 36A(1) [of the Federal Court Rules 1979 (Cth)], this amount would be further reduced to $234,160.84.”

17    Mr Arnold considered that Ms Young’s methodology appeared “to be appropriately conservative”. Nonetheless, he queried the quantum of costs charged for the preparation of submissions by Seafolly’s solicitors and whether the GST should be brought to account.

18    Ms Young responded to Mr Arnold’s suggestion that there should be a 20% discount imposed on the estimated party/party costs incurred by Seafolly. She accepted that a discount was appropriate. She said that this could be achieved in a variety of ways. One, which she had adopted, was to exclude solicitor/client work from the calculations and to allow only an hourly rate for work in accordance with the Federal Court scale when estimating the party/party costs.

19    An alternative approach, used in Nine Films and Sony Entertainment, was to apply a discount to the actual solicitor/client charges. Another approach was used in Beach Petroleum. There, costs were assessed on an indemnity basis in accordance with a costs agreement in relation to two of the respondents and on a party/party basis on scale in relation to another. Actual disbursements were also claimed. A discount of 7.5% was applied to the indemnity costs and 30% to the party/party costs.

20    Given these different methodologies, the cases relied on by Mr Arnold and the discounts allowed in them, did not, in Ms Young’s view, establish a relevant range.

21    Mr Arnold was asked to provide an updated report to deal with developments which had occurred between March 2013 and the making of the Court’s orders in December 2014. In doing so he laboured under a number of difficulties and his report was heavily qualified. He said that:

“Based upon my review of the materials I have available at the present time, I can advise the court:

1)    Notwithstanding the alteration of the costs awards in favour of Seafolly by way of orders of this court since April 2013, I maintain my opinions as to the suitability of the gross costs procedure to this matter;

2)    I am unable to comment on the quantum of costs Seafolly now seeks to be fixed for the proceedings overall as Ms. Young has had access to source invoices and other materials from the file of K & L Gates created after my last inspection of their file on 4 March 2013;

3)    Given the time period of the costs award is broader now than was in place in February/March 2013, it is trite to observe the cost to both parties of any traditional taxation of this award would be increased, even if the amount awarded overall was less, given a 15% global reduction now applies;

4)    The costs of this gross costs application for both parties would also have increased as there have been further hearing dates, further expert reports and further affidavits prepared;

5)    The methodology adopted by Ms Young between her first report dated 21 February 2013 and her third report dated 1 February 2015 appear to be consistent.”

SHOULD A LUMP SUM ORDER BE MADE?

22    The power to award lump or gross sum costs is intended, in appropriate cases, to avoid the expense, delay and aggravation involved in the taxation of costs and challenges to such taxation: see Seven Network Ltd v News Ltd [2007] FCA 2059 (Sackville J); Harrison v Schipp (2002) 54 NSWLR 738 at 742-3 (Giles JA); Telstra Corporation Limited v Phone Directories Company Pty Ltd (No 3) [2014] FCA 949 at [33] (Murphy J). Although it has been said that this power is particularly suited to “complex litigation”, the rule is not so confined. The power is available “whenever the circumstances warrant its exercise”: see Harrison at 742; Sony Entertainment (Australia) Limited v Smith (2005) 215 ALR 788 at 812 (Jacobson J).

23    The present litigation may fairly be characterised as complex. Pleadings were amended on both sides on a number of occasions. Fifteen witnesses provided a total of 22 affidavits. Six of the witnesses were cross-examined at trial. The trial extended over seven days. Multiple causes of action were relied on. Cross-claims were made.

24    Seafolly’s contention that any taxation would be likely to extend over many months is supported by the experience of the company in seeking to have a bill of costs relating to the Full Court appeal taxed. The process had not been completed more than 10 months after it had been commenced.

25    There can be little doubt that both parties would incur significant professional costs in having a bill of costs prepared in taxable form and in conducting a contested taxation. Even if Ms Young’s estimate of $118,000 for each party was marginally above Mr Arnold’s figure (on the assumption that Ms Young’s projected length of the taxation hearing was correct), the sum involved would be considerable.

26    I consider this to be an appropriate case in which a lump sum order should be made.

WHAT AMOUNT SHOULD BE ORDERED?

27    In calculating lump sum costs the Court does not proceed as if it were undertaking taxation. The authorities which guide the estimation process were summarised by Finn J in Ginos Engineers Pty Ltd v Autodesk Australia Pty Ltd (2008) 249 ALR 371 at 377:

“22    Rules of court such as r 21.02(2)(a) of the FMC Rules and O 62 r 4(2)(c) of the Federal Court Rules, which empower a court to order a gross amount in costs instead of an amount determined after taxation, are well accepted as being directed to the avoidance of expense, delay and the protraction of litigation, whether the case be a complex or a simple one: see Beach Petroleum NL v Johnson (No 2) (1995) 57 FCR 119 at 120 ; 135 ALR 160 at 162 (Beach Petroleum NL); Australasian Performing Rights Assn Ltd v Marlin [1999] FCA 1006; Nine Films & Television Pty Ltd v Ninox Television Ltd [2006] FCA 1046 (Nine Films & Television); see generally on fixing of costs by courts, G E Dal Pont, Law of Costs, Butterworths, Sydney, 2003, para [15.14] and following and R Quick and D J Garnsworthy, Quick on Costs, looseleaf, LBC Information Services, Sydney, para [6.20].

23    It is inconsistent both with the terms of r 21.02(2)(a) and to the clear objective in making a lump sum order that the costs in issue be subjected to the detailed scrutiny often applied in taxations: Leary v Leary [1987] 1 All ER 261 at 265; Dal Pont, 2003, paras [15.17] and [15.19]. In specifying a lump sum, it is well accepted that it is appropriate to apply a ‘much broader brush’ than would be applied on a taxation: see Sony Entertainment (Australia) Ltd v Smith (2005) 215 ALR 788; 64 IPR 18; [2005] FCA 228 at [196]-[200] (Sony Entertainment). Nonetheless, the discretion to make a lump sum order, no less than the general discretion to order costs, must be exercised judicially and in accordance with principle. In particular in making a lump sum estimate the approach of the court should be ‘logical, fair and reasonable’: Beach Petroleum NL at CLR 123; ALR 164; Nine Films & Television at [8].

24    It is not uncommon, particularly, but not only, in intellectual property cases, for the court to take as its starting point the evidence of the charges for professional costs incurred and disbursements made by the lawyers of the party awarded costs -- and this irrespective of whether the costs are to be estimated on an indemnity basis: compare Beach Petroleum NL at CLR 120; ALR 162; or on a party and party basis: compare Universal Music Australia Pty Ltd v Miyamoto [2003] FCA 812 at [29] and following. That figure is then characteristically adjusted to take account of the acceptability of the charges made, the conduct of the proceeding, the measure of success on issues and so on, to produce a sum which as a matter of judgment is neither overcompensatory nor prejudicial to the successful party. Consistent with the broad brush approach, that adjustment ordinarily is effected through the application of a discount to the figure accepted by the court on the available evidence as appropriately reflecting actual professional costs charged and disbursements made. The case law evidences wide variations in the percentages of discount sought and/or applied to reflect the exigencies of the matter in question: compare Sony Entertainment, 60%; Beach Petroleum NL, 39%, Nine Films & Television, 23%. What is clear is that a lump sum award may be in an amount that is greater or smaller than would have been the taxed costs payable: see Dal Pont, 2003, para [15.20].”

28    The Court strives to achieve an outcome that is “logical, fair and reasonable”. This will require avoidance of overestimation of recoverable costs on the one hand and avoiding “underestimating the appropriate amount, for example by applying an arbitrary discount to the amounts claimed” on the other: Seven Network at [25].

29    Seafolly calculated that the amount sought by it as a lump sum represented 73.6% of the actual costs and disbursements incurred by it. This, it submitted, was “well within the scope of lump sum costs awards granted by the Court for party/party costs in other proceedings.”

30    Ms Madden challenged this contention. Her position was that any discount should be calculated, not on actual professional costs and disbursements, but on estimated party/party costs. She placed particular reliance on the judgment of Gordon J in Telstra Corporation Limited v Phone Directories Company Pty Ltd [2011] FCA 1463. There her Honour made a lump sum costs order which, she said, represented 75% of the party/party costs and disbursements claimed by the respondents. Were this methodology to be applied in the present proceeding to the estimates made by Ms Young, Ms Madden submitted, Seafolly would only be entitled to a lump sum order of $357,346.46. The calculation would be made up as follows: Seafolly’s taxed party/party costs and disbursements were estimated at $560,543.48, less 15% (taking account of the order that she pay Seafolly 85% of its costs) - $476,461.95; less 25% - $357,346.46.

31    Seafolly responded that a discount should not be applied to Ms Young’s estimate of its party/party costs. It did so on the basis that Ms Young had already factored in a discount when calculating those costs.

32    Seafolly advised the Court that it pressed its application for the award of lump sum costs even if the Court were minded to accede to Ms Madden’s submissions and determine that a lower figure than that sought by it should be awarded.

33    The parties placed different constructions on Gordon J’s reasons. Both claimed that those reasons supported their respective positions. Some confusion arose because Gordon J said that she had ordered that “the applicants pay the respondents 75% of the party and party fees and disbursements claimed by the respondents”, fixed at $326,931.75: see at [13]. That figure was, however, 75% of $435,909 which her Honour had identified (at [1]) as the amount claimed by the respondents “for the total professional fees and disbursements” incurred by them (emphasis added). The dispute related to whether the figure of $435,909 to which her Honour had applied the 25% discount was the total of actual costs and disbursements or an estimate of what would have been allowed for costs and disbursements on a party/party taxation.

34    In my view the dispute can be resolved by examining a table which appears at [9] in her Honour’s reasons. She there sets out, in tabular form, a costs analysis undertaken by an expert consultant. It was necessary for the consultant to isolate professional costs and disbursements relating to the copyright issue which her Honour had determined. Additional costs had been incurred in relation to other issues. Having examined the respondents’ solicitors files the consultant identified total professional fees and total disbursements. Estimates were then made of the parts of each category which were attributable to the copyright issue. In a column headed “Estimated Professional Fees Relevant to Copyright” the total was $249,628. In a separate column, headed “Estimated Disbs Relevant to Copyright” a total of $186,179.35 appears. When these two figures are added they produce the sum of $435,807.35. This is near enough to the $435,909 recorded by her Honour in paragraph [1] of her reasons. The consultant then went on, in separate columns, to record fees and disbursements allowed on a party/party basis. These figures were, respectively, $218,004 and $146,689.96 – a total of $364,693.96. Her Honour, therefore, can be seen to have applied one discount of 25% to the actual costs and disbursements figure. As it happened the amount she awarded was about $40,000 less than the estimated party/party costs.

35    In the end the methodology adopted by the Court in cases such as Telstra Corporation, and others referred to by the parties, are of assistance but cannot be determinative. The Court is required to have regard to the exigencies of this particular case and to apply the principles to which I have referred with a view to reaching a logical, fair and reasonable figure.

36    As Finn J said in Ginos Engineers, the methodology employed by the Court ordinarily involves the application of a discount to the figure which the evidence suggests reflects the actual professional costs charged and disbursements made by the successful party. Seafolly’s actual costs and disbursements were estimated at $761,601.10. Eighty-five percent of this figure is $647,360.94. It is to this figure that I propose to apply a discount. In fixing the discount it is necessary for the Court to have regard to a range of matters peculiar to this proceeding. When the discount is applied the resultant figure may be more or less than the amount payable following a taxation.

37    Ms Madden ultimately argued that a discount in the range of 23-42% would be appropriate and that it should be applied to the party/party estimate. She said that a discount of 32% would be appropriate and within the range. She made this submission by reference to decided cases but did not point to any case-specific considerations which should inform a choice within that range.

38    As already noted, Seafolly contended that no discount should be applied. I reject that submission. It is based on the assumption that the discounts made by Ms Young, when estimating its party/party costs, were adequate to ensure that the quantum of the gross sum order would not exceed that which might fairly fall on Ms Madden. The authorities establish that a discount should be applied to actual costs incurred by the party seeking a gross sum order. The discount is intended to take account, not only of the inevitable reduction in the amount awarded as a result of a taxation on a party/party basis, but also to recognise that no such taxation has occurred and that any estimate of its outcome is just that and that a further allowance may be necessary in order to ensure fairness to the party against whom the order is made. Both underestimation and overestimation are, to the extent possible, to be avoided.

39    In the circumstances of the present case I consider that a discount of 30% is appropriate. I will, therefore, make an order, pursuant to r 40.02(b) that Ms Madden pay Seafolly a lump sum of $453,152.66. Interest will be payable, calculated in accordance with the Rules.

40    There was some reference, in written submissions, to the possibility that Order 62 r 36A of the Court’s Federal Court Rules 1979 (Cth) may apply because Seafolly was awarded less than $100,000 in damages. These references arose from Mr Arnold’s opinion that an “automatic one-third deduction” was to be applied (subject to contrary order) under that Rule. I did not understand Ms Madden to press any such suggestion. Had she done so I would have rejected it on the basis that the interlocutory application for the making of a lump sum costs order was made after the commencement of the present Rules and that, accordingly those Rules applied: see r 1.04(2).

COSTS OF THE APPLICATION

41    Seafolly submitted that, if it were successful in obtaining a gross sum costs order it should have its costs of the application. Ms Young had estimated those costs and disbursements on a party/party basis at $34,685.66.

42    Ms Madden intimated that she may wish to be heard on the costs of the application once these reasons were published. I will, therefore, make provision for her to file and serve short written submissions if she wishes to contend that the usual order for costs should not be made.

Associate:

Dated:    7 December 2015