FEDERAL COURT OF AUSTRALIA

Chhabra v McPherson as Trustee for the McPherson Practice Trust (No 2) [2019] FCA 448

ORDERS

THE COURT ORDERS THAT:

1.    The respondents pay the applicants’ costs occasioned by the filing of the respondents’ cross-claim.

2.    Subject to Order 1, the applicants pay the respondents’ costs:

(a)    before 11.00 am on 4 May 2017, on a party and party basis; and

(b)    after 11.00 am on 4 May 2017, on an indemnity basis.

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

REASONS FOR JUDGMENT

YATES J:

Introduction

1    On 14 November 2018, I made an order dismissing the applicants’ amended originating application: Chhabra v McPherson as Trustee for the McPherson Practice Trust [2018] FCA 1755) (my earlier reasons). At that time, I expressed the view that costs should follow the event.

2    The respondents, who were successful in their defence of the applicants’ claim, seek a special costs order based on a notice of offer to compromise dated 2 May 2017 (the respondents’ offer or, simply, the offer), which was served on the applicants: see r 25.01 of the Federal Court Rules 2011 (the Rules). The order they seek is that the applicants pay their (the respondents’) costs:

(a)    before 11.00 am on 4 May 2017, on a party and party basis; and

(b)    after 11.00 am on 4 May 2017, on an indemnity basis.

3    The substantive terms of the offer were that:

(a)    the respondents would undertake to permanently refrain from reproducing, publishing, or communicating the Kaden Boriss Logos (as defined in my earlier reasons) or otherwise using the Kaden Boriss name or any variation thereof in relation to the supply of legal services, except as required by law and as necessary for the purpose of identifying the respondents’ law firm as being formerly known as Kaden Boriss, from 2 September 2017;

(b)    the respondents would pay to the applicants $40,000 in full and final settlement of all claims; and

(c)    the proceeding be dismissed with no order as to costs.

4    The offer was expressed to be made on an open basis, inclusive of interest and costs, and open for acceptance for 14 days after service of the offer.

Background

5    The offer was accompanied by a covering letter which set out, by way of argument, a number of “problems” from which, the respondents argued, the applicants’ claim suffered. As events transpired, not all these “problems” were translated into findings in my earlier reasons. However, the letter did identify certain matters which can be said to reflect, substantially, findings that came to be made.

6    First, the letter stated that the applicants had not identified a basis for the contention, in paragraph 27 of the further amended statement of claim (the statement of claim), that the respondents’ rights in relation to the Kaden Boriss name and branding were dependent on the applicants’ continued use of that name or on the applicants’ continued consent.

7    Secondly, the respondents argued that the applicants had not identified how they could be the owners of the copyright in the Kaden Boriss Logos in the absence of a written assignment in their favour: see s 196 of the Copyright Act 1968 (Cth).

8    Thirdly, the claims based on copyright infringement could not succeed because the applicants were not the owners of the copyright in the Kaden Boriss Logos and the respondents’ continued membership of the Kaden Boriss network expressly authorised them to continue to use the Kaden Boriss name and branding materials in relation to the provision of legal services.

9    Fourthly, the claims based on passing off and contravention of the Australian Consumer Law were bound to fail because the respondents had themselves established a reputation in the Kaden Boriss brand in relation to the provision of legal services, which had been acquired with the express knowledge, cooperation and encouragement of the applicants, and there was no risk of any consumer confusion.

10    As to the first matter, I found that the applicants had not terminated the respondents’ right to use the Kaden Boriss Logos and, further, that their pleaded case (which was, in effect, that, because the applicants expressed their intention to leave the Kaden Boriss network, the respondents were no longer permitted to use the logos) was not maintainable: see at [126] - [127]. I also found that the licence that had been granted to the respondents to use the Kaden Boriss Logos was not a gratuitous or bare licence. It was a contractual licence that entitled them to use the Kaden Boriss Logos which could only be withdrawn for just cause: see at [133] - [136]. Further, even if it were a bare or gratuitous licence, the licence could not be withdrawn at will but, once again, only for just cause or, perhaps, on reasonable notice being given: see at [137] - [139].

11    As to the second matter, I found that Mr Lal and Mr Batra were joint owners of the Australian copyright in the Kaden Boriss Logos. This was where the chain of title ended. There was no further or subsequent assignment. Mr Lal was not the sole owner of the copyright, which was the applicants’ case ultimately advanced at the hearing: see at [112].

12    As to the third matter, it followed from my finding that Mr Lal and Mr Batra were the joint owners of the Australian copyright in the Kaden Boriss Logos and that the applicants were not the owners. Further, I found that the respondents had been granted a licence to use the Kaden Boriss Logos and the Kaden Boriss name to enable them to participate in the Kaden Boriss network. Indeed, the respondents’ participation in the network obliged them to adopt and use the Kaden Boriss name, and to adopt and use stationery and marketing materials that were consistent with the materials that had been devised for the network as a whole. In short, the respondents’ participation in the network obliged them to use trade indicia (including the Kaden Boriss Logos) that had been developed for, and approved for use in, the network, rather than other indicia of their own design and creation: see at [134] - [135].

13    As to the fourth matter, I found that by 24 October 2016, if not well before then, the reputation in the Kaden Boriss name and the Kaden Boriss Logos in Australia was a shared reputation that denoted the applicants’ firm and the legal services they provided, as well as the respondents’ firm and the legal services they provided, each as part of a global network of law firms operating under the Kaden Boriss name and style. The respondents were entitled to continue to use the Kaden Boriss name as an incident of their own reputation and goodwill. They did not need the applicants’ continuing permission to do so in the absence of the applicants remaining in the network. The original permission that had been granted to the respondents to use the Kaden Boriss name and the Kaden Boriss Logos enured for their benefit and had not been revoked: see at [161] - [162].

14    It is appropriate that I should also refer to certain background matters of a procedural nature. As I recorded in my earlier reasons, on 9 January 2017 the respondents filed a Claim and Statement of Claim in the Supreme Court of Queensland alleging that the applicants had contravened ss 18 and 29(1)(h) of the Australian Consumer Law and engaged in passing off. The Statement of Claim also included an allegation that the applicants had breached fiduciary obligations owed to the respondents: at [68]. On 3 January 2017, the applicants responded in kind and filed a Statement of Claim in the Equity Division of the Supreme Court of New South Wales, alleging that the respondents had contravened ss 18 and 29(1)(h) of the Australian Consumer Law and engaged in passing off.

15    The parties’ respective Supreme Court proceedings were discontinued after the proceeding in this Court was commenced on 17 January 2017. The respondents’ Supreme Court proceeding was discontinued without a costs order and without prejudice to any of the parties filing similar proceedings in relation to the subject matter of the present proceeding.

16    As events transpired, the respondents filed a cross-claim in the present proceeding on 27 March 2017. The cross-claim sought a declaration that, until 2 September 2017, the respondents were entitled to use the Kaden Boriss Logos, and the Kaden Boriss name and get up. It also sought an injunction restraining the applicants from asserting that, prior to 2 September 2017, the respondents were not entitled to use the Kaden Boriss Logos, and the Kaden Boriss name and get up.

17    The pleaded basis for this relief was that the respondents had a licence from Mr Batra to use the Kaden Boriss Logos and the Kaden Boriss name and get up (referred to in the pleading as the KB IP), which had been subsequently ratified and extended by Mr Batra. The respondents pleaded that, on or about 26 October 2016, the applicants, who had been part of the Kaden Boriss network (referred to in the pleading as the KB Group), had given notice of their intention to leave the KB Group, and that this notice did not have the effect that the respondents were no longer permitted to use the KB IP. The respondents further pleaded that the licence they held to use the KB IP was not granted by the applicants and that the applicants held no power that would enable them to terminate that licence. Finally, the respondents pleaded that they had given notice to Mr Batra of their intention to cease using the Kaden Boriss name on or before 2 September 2017. Therefore, the applicants were not entitled to assert that the respondents were not licensed or entitled to use the KB IP.

18    It can be seen that the cross-claim was defensive in nature. It was seeking relief to preserve the respondents’ asserted entitlement to use the KB IP until 2 September 2017.

19    The respondents’ cross-claim was extant at the time the offer was made. The applicants accept that the respondents’ offer sought to settle the entire proceedings—the applicants’ application and the respondents’ cross-claim.

20    On 18 April 2017, the applicants filed a defence to the cross-claim. This was before the first case management hearing on 24 May 2017. On 28 September 2017, at a further case management hearing, the respondents sought an order dismissing the cross-claim. An order was made, reserving the question of costs. The applicants say that the respondents had not indicated prior to the case management hearing on 28 September 2017 that they wished to abandon the cross-claim.

The legal basis for the respondents’ claim to a special costs order

21    Rule 25.14 provides:

(1)    If an offer is made by a respondent and not accepted by an applicant, and the applicant obtains a judgment that is less favourable than the terms of the offer:

(a)    the applicant is not entitled to any costs after 11.00 am on the second business day after the offer was served; and

(b)    the respondent is entitled to an order that the applicant pay the respondent's costs after that time on an indemnity basis.

(2)    If an offer is made by a respondent and an applicant unreasonably fails to accept the offer and the applicant's proceeding is dismissed, the respondent is entitled to an order that the applicant pay the respondent's costs:

(a)    before 11.00 am on the second business day after the offer was served - on a party and party basis; and

(b)    after the time mentioned in paragraph (a) - on an indemnity basis.

22    In their written submissions, the respondents seek to rely on both r 25.14(1) and r 25.14(2). However, r 25.14(1) does not support the costs order they seek, for two reasons. First, the respondents want their costs up to 11.00 am on 4 May 2017 on a party and party basis. Only r 25.14(2) provides, at least expressly, for the costs order the respondents seek. Secondly, and perhaps more importantly, r 25.14(1) is directed to a case where an applicant “obtains a judgment”. Here, the applicants have not obtained a judgment. I proceed, therefore, on the basis that r 25.14(2) is the relevant rule for consideration.

23    In conjunction with their reliance on r 25.14(2), the respondents also rely on the broad discretion with respect to costs reposed in the Court by s 43 of the Federal Court of Australia Act 1976 (Cth) (the Federal Court Act) and the principles applicable to Calderbank offers: Calderbank v Calderbank [1975] 3 All ER 333.

The respondents’ submissions

24    The respondents submit that their offer was made early in the proceeding but not so early that the applicants could not fully appreciate the difficulties with their case and assess the reasonableness of what was being put to them. The offer was accompanied by a letter articulating the difficulties with the applicants’ case, as the respondents saw them to be. The reasons articulated by the respondents were broadly consistent with the reasons given by the Court for dismissing the application. All the facts necessary to assess their prospects of success, in light of the matters advanced by the respondents in the covering letter, were known.

25    The respondents submit, further, that their offer was open for 14 days (thereby providing a reasonable time for the applicants to assess their position), was clear, and foreshadowed that an application for indemnity costs would be made in the event that the applicants rejected the offer.

26    The respondents also submit that the offer they made represented a genuine compromise: the respondents would forego their own costs, pay the applicants $40,000, and undertake to cease using the Kaden Boriss Logos and Kaden Boriss name (subject to the qualifications noted above).

27    The respondents submit that the applicants’ rejection of the offer was unreasonable in the circumstances.

The applicants’ submissions

28    The applicants resist the costs order now sought, although they do not resist the proposition that they should pay the respondents’ costs of their (the applicants’) application on a party and party basis. They submit that it would be inappropriate to award indemnity costs “in circumstances where the nature of the litigation changed significantly” after the offer was made, and that “consequently, the failure to accept the [offer] was not imprudent or unreasonable such that the Court should award indemnity costs against” them. The applicants’ reference to changed circumstances appears to be a reference to the abandonment by the respondents of their cross-claim.

29    The applicants also submit that, at the time the respondents’ offer was made, they had not been afforded a realistic opportunity to consider the strength or otherwise of the respondents’ position vis a vis their own position: see Fyna Foods Australia Pty Ltd v Cobannah Holdings Pty Ltd (No 2) [2004] FCA 1212 at [9]. In this connection, they argue that, at the time of the offer:

    the parties had not attended a case management hearing in the proceeding;

    the cross-claim was on foot;

    pleadings had not closed; and

    neither party had filed affidavit evidence.

30    By reference to these matters, the applicants submit that:

    they had no opportunity to consider and deal with the offer in circumstances where their knowledge of the relevant facts, the contentions against them (including in respect of the cross-claim) or their knowledge of their prospects were no further advanced than when they had filed their application; and

    the cross-claim was manifestly hopeless, as signified by the respondents’ abandonment of it.

31    The applicants further submit that, in my earlier reasons, I made no finding that their case was bound to fail or that it was otherwise without merit. They also contend that they are “of modest means” and that “an indemnity costs order will have a significant financial impact on each of them”.

conclusion

32    It is true that the respondents’ offer was made early in the proceeding. But, on the particular facts and circumstances of this case, I do not see this as militating in favour of the applicants and against the respondents on the question of the whether the applicants’ failure to accept the offer was reasonable.

33    At the outset, it was necessary for the applicants to establish their title to the copyright in the Kaden Boriss Logos and their right to terminate the respondents’ licence to use the Kaden Boriss Logos and the Kaden Boriss name. These were fundamental elements of the applicants’ claim.

34    As to the first matter, the question of copyright ownership was, in this case, essentially a legal one bearing in mind the requirements of s 196(3) of the Copyright Act 1968 (Cth) for the assignment of copyright ownership. It was for the applicants to satisfy themselves of their asserted title before commencing the proceeding. I found that the chain of title to the Australian copyright in the Kaden Boriss Logos finished with Mr Lal’s and Mr Batra’s joint ownership. The evidence that was relevant to the applicants’ claimed ownership of copyright in the Kaden Boriss Logos was known to them at the time they commenced the proceeding. Having regard to the applicants’ evidence, it does not seem to me that there was a realistic basis on which they could claim that they were the owners. When making the offer, the respondents specifically addressed the question of the applicants’ claimed ownership, pointing out that the applicants had not identified how they could be the owners of the copyright in the absence of a written assignment in their favour satisfying the requirements of s 196(3).

35    As to the second matter, I found that the applicants’ pleaded basis for alleging that the respondents’ licence to use the Kaden Boriss name had been terminated was not maintainable. The respondents pointed this out to the applicants at the time they (the respondents) made their offer. There were also other impediments (summarised above) to this aspect of the case succeeding, which the respondents drew to the applicants’ attention.

36    Each of these matters should have been at the forefront of the applicants’ minds at the time they commenced their proceeding. They should certainly have been at the forefront of their minds when the offer was made and the flaws in their case were brought to their attention by the respondents.

37    The offer made by the respondents represented, on any view, a genuine and substantial compromise. By it, the respondents not only offered to “give away” any potential entitlement to recover their own costs, but they also offered to pay the applicants $40,000. Further, they offered the undertaking to cease using the Kaden Boriss Logos and name (except as required by law and as necessary to identify their firm as formerly known as Kaden Boriss). This undertaking would have provided, in substance, the injunctive relief the applicants were seeking. Indeed, it would have provided effective relief in that regard from a date earlier than the applicants could have obtained an injunction at a final hearing, assuming they had a valid claim for such relief.

38    I reject the applicants’ submission that the nature of the litigation changed significantly after the respondents’ offer was made. As I have noted, the cross-claim was defensive in nature and only sought to preserve the respondents’ entitlement to use the Kaden Boriss Logos and name until 2 September 2017.

39    I also reject the applicants’ submission that an award of indemnity costs should not be made because they are of modest means and that such an order would have a significant financial impact on them. There is no evidence before the Court of the applicants’ financial circumstances. In any event, even if the applicants are of “modest means”, I do not see this as a reason why, in the circumstances of this case, an award of indemnity costs should not be made.

40    I am persuaded that this is an appropriate case for an award of indemnity costs. The applicants’ failure to accept the offer was, in the circumstances, unreasonable. Subject to the matter next discussed, the order sought by the respondents should be made.

41    The respondents elected not to proceed with their cross-claim. The applicants were put to the unnecessary cost of filing a defence. The basis on which the cross-claim was advanced—a purported licence granted by Mr Batra—was misconceived. The cross-claim would not have succeeded on that basis. In the circumstances, it is just that the respondents pay the applicants’ costs occasioned by the filing of the cross-claim.

42    Although r 25.14 is engaged, I prefer to base my order on the general and plenary power of s 43(2) of the Federal Court Act.

Disposition

43    Orders will be made accordingly.

Associate:    

Dated:    3 April 2019