Creative Smiles Pty Ltd v Ekera Dental Pty Ltd (No 3)
[2023] VCC 1083
•28 June 2023
| IN THE COUNTY COURT OF VICTORIA AT Melbourne commercial DIVISION | Revised Not Restricted Suitable for Publication |
Case No. CI-19-04997
| CREATIVE SMILES PTY LTD (ACN 116 150 353) | First plaintiff |
| JOHN GOODMAN | Second plaintiff |
| v | |
| EKERA DENTAL PTY LTD (ACN 163 686 146) | First defendant |
| ANTHONY COULEPIS | Second defendant |
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JUDGE: | HIS HONOUR JUDGE COSGRAVE | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | Determined on the papers (the parties provided written submissions to the court on 1 June 2023 and the plaintiffs provided reply submissions on 8 June 2023) | |
DATE OF JUDGMENT: | 28 June 2023 | |
CASE MAY BE CITED AS: | Creative Smiles Pty Ltd & Anor v Ekera Dental Pty Ltd & Anor (No 3) | |
MEDIUM NEUTRAL CITATION: | [2023] VCC 1083 | |
REASONS FOR JUDGMENT (No 3)
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Subject: COSTS
Catchwords: Offers of compromise under Order 26 – Calderbank offers – Section 570 of the Fair Work Act – the court’s power to “otherwise order” under r 26.08(2) – unreasonableness of refusing offers – no “unreasonable act or omission” – refusal justified – no order as to costs
Legislation Cited: County Court Civil Procedure Rules 2018; Civil Procedure Act 2010; Fair Work Act 2009 (Cth)
Cases Cited:Alpine Hardwoods (Aust) Pty Ltd v Hardys Pty Ltd (No 2) (2002) 190 ALR 121; Altintas v O’Dea Lawyers (No 2) [2018] FCAFC 187; Australian Workers Union v Leighton Contractors Pty Ltd (No 2) (2013) 232 FCR 428; Baker v Patrick Projects Pty Ltd (No 2) [2014] FCAFC 166; BDR21 v Australian Broadcasting Corporation (No 2) [2021] FCA 1347; BHP Billiton Olympic Dam Corp Pty Ltd v Steuler Industriewerke GmbH (No 3) [2012] VSC 414; BSA Ltd v Bradshaw (No 2) [2021] FCA 1182; Celand v Skycity Adelaide Pty Ltd (2017) 256 FCR 306; Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1; Construction, Forestry, Mining and Energy Union vClarke (2008) 170 FCR 574; Council of Kangan Batman Institute of Technology and Further Education v Australian Industrial Relations Commission and Anor (2006) 156 FCR 275; Fair Work Ombudsman v Grouped Property Services (No 3) [2017] FCA 810; Futuretronics.com.au Pty Ltd v Graphix Labels Pty Ltd [2009] FCAFC 40; Hot Wok Food Makers Pty Ltd v United Workers Union (No 2) [2023] FCA 363; IFTC Broking Services Limited v Commissioner of Taxation (2010) 268 ALR 1 (FCAFC); Joseph v Parnell Corporate Services Pty Ltd (2021) 284 FCR 546; Kanan v Australian Postal and Telecommunications Union (1992) 43 IR 257; Melbourne Stadiums Ltd v Sautner (2015) 229 FCR 221; Messenger v Commonwealth of Australia (No 2) [2023] FCA 20; Mutch v ISG Management Pty Ltd (No 2) [2020] FCA 954; Nilsen v Loyal Orange Trust (1997) 76 IR 180; PIA Mortgage Services Pty Ltd v King (No 2) [2020] FCAFC 53; R v Moore; ex parte Federated Miscellaneous Workers’ Union of Australia (1978) 140 CLR 470; Spotless Services Australia Ltd v Senior Deputy President Marsh [2004] FCAFC 155; Stanley v Service To Youth Council Inc (No 3) (2014) 225 FCR 357; Stolz v Registered Clubs Association of New South Wales [2022] FCA 1451; Stratton Finance Pty Ltd v Webb (2014) 314 ALR 166; Tucker v State of Victoria (No 2) [2021] VSCA 182; ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr M J Rivette | RM Commercial & Family Lawyers |
| For the Defendants | Mr A M J Meagher | Hassett & Co |
HIS HONOUR:
Introduction
1On 16 December 2022 I delivered my reasons for judgment in the principal proceeding between the parties (“the principal reasons”). Then on 12 May 2023 I delivered my judgment on the question of what civil penalties, if any, should be ordered against the defendants in relation to the contraventions of the Fair Work Act 2009 (Cth) (“FWA”) identified in the principal reasons (“the penalty reasons”). This judgment addresses the costs of the litigation. It assumes familiarity with the principal reasons and the penalty reasons. For ease of reference, I use the same terminology as used in those judgments.
Background
2On 22 October 2019:
(a) Creative Smiles commenced proceeding number CI-19-04997 alleging among other things breaches of the Acquisition Agreement and Services Agreement and misleading conduct by Ekera (“the commercial claims”); and
(b) Goodman commenced proceeding CI-19-04993 for unpaid wages and entitlements due to him from Ekera under the FWA (“the employment claims”).
3On 24 February 2020, the commercial claims and the employment claims were formally consolidated when Judicial Registrar Burchell ordered that proceeding CI-19-04997 be consolidated with proceeding CI-19-04993. The judicial registrar also ordered that the proceedings and documents served in the latter proceeding stand as the pleadings and documents filed and served in the former proceeding and that the parties in CI-19-04993 stand as parties in CI-19-04997. Subsequently, for reasons which are unclear, Judge Woodward on 3 June 2021 joined Goodman as the second plaintiff in proceeding CI-19-04997 and granted Creative Smiles leave to file and serve a Further Amended Statement of Claim which incorporated the pleadings and parties in the Statement of Claim dated 22 October 2019 filed in proceeding CI-19-04993.
4As a result of the delivery of the principal reasons and the penalty reasons, I found that:
· Ekera should pay Creative Smiles $136,687.84 damages plus interest, being a total sum of approximately $180,652.64;
· Ekera should pay Goodman $44,175.86 for unpaid wages together with interest to the date of judgment, being a total sum of approximately $69,531.59;
· Ekera should pay Goodman $4,031.17 for unpaid annual leave and holiday loading plus interest in the sum of approximately $2,313;
· Ekera should pay Goodman $3,454.43 for unpaid public holiday pay and loading plus interest in the amount of approximately $1,982;
· Ekera should pay Goodman $4,920.60 for unpaid superannuation plus interest in the amount of approximately $2,543.
5The aggregate amount awarded to the plaintiffs was therefore approximately $269,430. Of this, the total payment arising from the contraventions of the FWA was approximately $88,777.
6The plaintiffs seek a special costs order against the defendants. The defendants failed to respond to three offers which the plaintiffs made before trial in order to settle the proceeding. The plaintiffs contend that the offers were more favourable to the defendants than the outcome of the trial and that the defendants’ refusal to respond to, much less accept, the proposals was unreasonable.
7The offers were as follows:
(a) an offer of compromise dated 26 June 2020 (“the First Offer”) offering to settle all claims by Ekera paying the plaintiffs the sum of $200,000 plus party/party costs and disbursements (which at the time were $41,763.34);
(b) a Calderbank offer made on 21 February 2021 (“the Second Offer”) offering to settle all claims for the equivalent of $150,000;
(c) an offer of compromise made on 7 April 2021 (“the Third Offer”) offering to settle all claims for the equivalent of $110,000.[1]
[1]The proposed payment was $130,000. But it excludes a costs order made against the plaintiffs on 18 February 2021 which was likely to total about $20,000.
8As a result of the above offers, Creative Smiles seeks its costs on the commercial claims on a standard basis from the date of issuing the writ until:
· 11.00am on 23 February 2021 being the date when the Calderbank offer expired; or alternatively
· 11.00am on 9 April 2021 being two days after the offer of compromise.
9Creative Smiles then seeks its costs on an indemnity basis from 11.00am on 23 February 2021 or alternatively 9 April 2021.
10In addition, the plaintiffs contend that the court should find the failure by Ekera to accept any of the three settlement offers made by the plaintiffs constituted an unreasonable act or omission by Ekera within the terms of section 570 of the FWA. In the circumstances, Goodman seeks his costs relating to the employment claims on a standard basis or alternatively an indemnity basis from:
· 11.00am on 23 February 2021; or alternatively
· 11.00am on 9 April 2021.
11An important factor in the court’s determination regarding costs is section 570 of the FWA which provides as follows:
(1)A party to proceedings (including an appeal) in a court (including a court of a State or Territory) in relation to a matter arising under this Act may be ordered by the court to pay costs incurred by another party to the proceedings only in accordance with subsection (2) or section 569 or 569A.
(2) The party may be ordered to pay the costs only if:
(a)the court is satisfied that the party instituted the proceedings vexatiously or without reasonable cause; or
(b)the court is satisfied that the party’s unreasonable act or omission caused the other party to incur the costs; or
(c) the court is satisfied of both of the following:
(i)the party unreasonably refused to participate in a matter before the Fair Work Commission;
(ii)the matter arose from the same facts as the proceedings.
12Accordingly, the plaintiffs need to persuade the court that an unreasonable act or omission by the defendants caused the plaintiffs to incur costs in this litigation.
13The defendants contend that section 570 of the FWA governs the proceedings and, as a result, no costs are payable. Further, they say that it was not unreasonable of them to reject the offers of compromise proffered by the plaintiffs.
Legal principles
14There are some well accepted legal principles with respect to the court’s powers regarding costs:
(a) the award of costs is within the discretion of the court;
(b) the discretion must be exercised judicially. It cannot be exercised arbitrarily or capriciously. Nor can it be exercised on grounds unconnected with the litigation or the circumstances leading up to the litigation;
(c) costs are compensatory in the sense that they are awarded to indemnify the successful party against the expense to which it has been put by reason of the legal proceedings. The aim of a costs order is not to punish the unsuccessful party.
15There are three areas of contention raised by the present case: offers of compromise under Order 26; Calderbank offers; and the operation of section 570 of the FWA.
Offers of compromise under Order 26
16The cost consequences for a defendant who fails to accept an offer of compromise under Order 26 of the County Court Civil Procedure Rules 2018 (“the Rules”) where the plaintiff ultimately receives a more favourable judgment are set out in Rule 26.08(2)(b) which relevantly provides:
“Where an offer of compromise is made by a plaintiff and not accepted by the defendant, and the plaintiff obtains a judgment on the claim to which the offer relates no less favourable to the plaintiff than the terms of the offer, then, unless the Court otherwise orders, the plaintiff shall be entitled:
…
in the case of any other claim of the plaintiff, to an order against the defendant for the plaintiff’s costs in respect of the claim before 11.00a.m. on the second business day after the offer was served, taxed on the ordinarily applicable basis and for the plaintiff’s costs thereafter taxed on an indemnity basis.”
17In determining the proper application of Order 26 to a case, the court needs to consider:
· whether the plaintiff’s offer represented a genuine compromise;
· whether the judgment obtained is no less favourable than the offer;
· assuming the judgment is no less favourable, whether the court should otherwise order.
18The defendant has a heavy onus in persuading the court to “otherwise order”. The party will need to persuade a court that the purposes of Order 26 are best served by not giving effect to the usual presumption. The prima facie position established by the rule is a strong one which is not easily displaced. In order to do so, a defendant would need to show compelling circumstances which justified a departure from the general rule. Broadly speaking, the purpose of Order 26 is to encourage the compromise of litigation and the saving of the private and public expenditure associated with it. The reasonableness of a party’s conduct in rejecting an offer is a matter which may be taken into account but it is not determinative.
Calderbank offers
19The legal principles in relation to Calderbank offers were conveniently and comprehensively summarised by Habersberger J in BHP Billiton Olympic Dam Corp Pty Ltd v Steuler Industriewerke GmbH (No 3),[2] where he said:[3]
[2][2012] VSC 414
[3] Ibid [58]
“Steuler next based its claim for indemnity costs in respect of part of the proceedings on the existence of seven separate offers of settlement, some of which were made in accordance with the decision in Calderbank v Calderbank. There are a number of relevant principles regarding Calderbank offers of settlement which it is appropriate to note before examining each of the offers made by Steuler. The standard starting point for such an examination is the joint judgment of Warren CJ, Maxwell P and Harper AJA in Hazeldene’s Chicken Farm Pty Ld v Victorian Workcover Authority (No 2) (Hazeldene).
First, the fact that a less favourable result is achieved does not give rise to a presumption of a special costs order. The making of an offer and its rejection are “but two albeit important circumstances” to which the court will have regard in the exercise of its costs discretion.
Secondly, the competing policy objectives relevant to the exercise of the costs discretion are principally the desirability of promoting settlement and reducing litigation costs as against the undesirability of discouraging potential litigants from bringing their dispute to the courts.
Thirdly, the critical question is whether the rejection of the offer was unreasonable in the circumstances. As the Court of Appeal said in Hazeldene:
In our view, these competing considerations can be sufficiently accommodated by applying a test of (un)reasonableness. The critical question is whether the rejection of the offer was unreasonable in the circumstances. We see no justification for a more stringent test such as “manifestly” or “plainly” unreasonable.
Fourthly, a court considering submissions that the rejection of a Calderbank offer was unreasonable should ordinarily have regard at least to the following matters:
(a) the stage of the proceeding at which the offer was received;
(b) the time allowed for the offeree to consider the offer;
(c) the extent of the compromise offered;
(d) the offeree’s prospects of success, assessed as at the date of the offer;
(e) the clarity with which the terms of the offer were expressed; and
(f) whether the offer foreshadowed an application for indemnity costs in the event of the offeree rejecting it.
Fifthly, as the determination of whether it was unreasonable for the offeree to have rejected the offer is made “as at the time, or within a reasonably short time after, the offer” was made, the court should not too readily embrace submissions that it was inevitable that the proceedings would fail. As Hamilton J put it in Grynberg v Muller:
These submissions focus the bright light of hindsight. Hindsight sings a siren song of which Judges must be cautious …
Sixthly, the onus lies on the offeror to demonstrate the unreasonableness of the offeree’s rejection of the offer. This means that it is necessary to analyse what was proposed.
Seventhly, there is no general rule that the Calderbank offer must set out with specificity the basis for the offeror’s contention that the offeree should accept the compromise. Whether there is a need to do so depends upon a consideration of all of the circumstances existing at the time of the offer.
Eighthly, it is not necessary for the applicant for an indemnity costs order to establish matters which might be relevant to other, well-recognised, grounds for indemnity costs. Such conduct is not a pre-requisite for a finding that the rejection of the Calderbank offer was unreasonable.
Ninthly, an “all in” offer is permitted in a Calderbank offer.”[4]
[4]Ibid at [58]-[67]
Section 570 of the Fair Work Act
20I have set out in paragraph 11 above the terms of section 570 of the FWA.
21In Tucker v State of Victoria (No 2)[5] the Victorian Court of Appeal stated that the following principles apply in the case of section 570(2)(b):
(a) paragraph (b) is enlivened when two criteria are satisfied:[6]
(i)one party has engaged in an “unreasonable act or omission”; and
(ii)that unreasonable act or omission has caused the other party to incur costs.
[5] [2021] VSCA 182
[6]Altintas v O’Dea Lawyers (No 2) [2018] FCAFC 187, [6], [13]–[14] (White, Perry and Charlesworth JJ); Baker v Patrick Projects Pty Ltd (No 2) [2014] FCAFC 166
(b) unreasonableness is to be determined objectively. It is a question of impression and degree, to be assessed by reference to the particular circumstances of a given case.[7]
(c) unreasonableness is not to be confused with negligence or inefficiency.[8] A failure to conduct litigation in the most efficient way does not, without more, enliven the paragraph.[9] The fact that a party has conducted litigation inefficiently, made belated concessions, or adopted a misguided approach may be relevant to, but will not be conclusive of, the question of unreasonableness.[10]
[7]PIA Mortgage Services Pty Ltd v King (No 2) [2020] FCAFC 53, [15] (Rangiah, Charlesworth and Snaden JJ)
[8] Fair Work Ombudsman v Grouped Property Services (No 3) [2017] FCA 810, [26] (Katzmann J)
[9]Construction, Forestry, Mining and Energy Union vClarke (2008) 170 FCR 574, 582 [29] (Tamberlin, Gyles and Gilmour JJ)
[10] Mutch v ISG Management Pty Ltd (No 2) [2020] FCA 954, [8] (Bromberg J)
22More recently Halley J in BDR21 v Australian Broadcasting Corporation (No 2)[11] said that the following principles emerge from the authorities with respect to the application of section 570(2)(b) of the FWA:[12]
“(a) the occasions on which costs will be awarded under s 570 of the FW Act are likely to be exceptional: Mutch v ISG Management Pty Ltd (No 2) [2020] FCA 954 (Mutch) at [8] (Bromberg J);
(b) the touchstone for the exercise of the power is unreasonableness, not negligence or inefficiency: Fair Work Ombudsman v Grouped Property Services Pty Ltd (No 3) [2017] FCA 810 (Grouped Property Services) at [26] (Katzmann J); Tucker v State of Victoria [No 2] [2021] VSCA 182 (Tucker) at [32(h)] (Kyrou, McLeish and Sifris JJA);
(c) the fact that a party has conducted litigation inefficiently, made belated concessions, or adopted a misguided approach may be relevant to, but will not be conclusive of, the question of unreasonableness: Mutch at [8] (Bromberg J) citing Construction Forestry, Mining and Energy Union v Clarke (2008) 170 FCR 574; [2008] FCAFC 143 (Clarke) at [29] (Tamberlin, Gyles and Gilmour JJ) and Hutchinson v Comcare (No 2) [2017] FCA 370 (Comcare (No 2)) at [8] (Bromberg J); Tucker at [32(h)];
(d) the term “unreasonableness” is not conducive to precise definition, rather it is to be understood as controlling the extent of the limitation on the making of a costs order pursuant to s 570 of the FW Act and it takes much of its meaning from the underlying reason for that limitation: Mutch at [7];
(e) unreasonableness is to be determined objectively, it is a question of impression and degree and is to be assessed by reference to the particular circumstances of a given case: Tucker at [32(g)] citing PIA Mortgage Services Pty Ltd v King [No 2] [2020] FCAFC 53 at [15] (Rangiah, Charlesworth and Snaden JJ);
(f) it is well settled that the limitation imposed by s 570 of the FW Act seeks to provide access to justice by ensuring that the fear of an adverse costs order does not discourage litigants from pursuing good claims: Mutch at [7] citing Trustee for The MTGI Trust v Johnston (No 2) [2016] FCAFC 190 at [8] (Siopis, Collier and Katzmann JJ); Ryan v Primesafe [2015] FCA 8 at [64] (Mortimer J); Comcare (No 2) at [8] (Bromberg J);”
[11] [2021] FCA 1347
[12]Ibid at [26]
23In Australian Workers Union v Leighton Contractors Pty Ltd (No 2)[13] Dowsett, McKerracher and Katzmann JJ made a number of observations about section 570 of the FWA, noting that the authorities established that:
· the purpose or policy of the section is to free parties from the risk of having to pay their opponents’ costs in matters arising under the FWA, while at the same time protecting those parties who are forced to defend proceedings that have been instituted vexatiously or without reasonable cause.[14]
· it follows from the protection offered by section 570(2) that a person will rarely be ordered to pay the costs of a proceeding. But it is not necessary to prove that there are exceptional circumstances warranting the making of an order.[15]
· the relevant question is whether the proceeding had reasonable prospects of success at the time it was instituted, not whether it ultimately failed.[16]
[13] (2013) 232 FCR 428
[14] Ibid at [7]
[15]Spotless Services Australia Ltd v Senior Deputy President Marsh [2004] FCAFC 155 at [12]-[13] (“Spotless”)
[16]R v Moore; ex parte Federated Miscellaneous Workers’ Union of Australia (1978) 140 CLR 470 at 473 per Gibbs J; Council of Kangan Batman Institute of Technology and Further Education v Australian Industrial Relations Commission and Anor (2006) 156 FCR 275 at [60]
24The underlying policy of this provision of the FWA, with its emphasis on access to justice, recognises that an applicant will not suffer cost consequences in pursuing a case which is weak but not utterly hopeless.[17] The mirror image of this proposition would be that a defendant should be able to defend a claim without suffering a costs order when running a defence which is weak but not utterly hopeless.
[17] Nilsen v Loyal Orange Trust (1997) 76 IR 180, 181 per North J quoted in Messenger at [13]
25In relation to a plaintiff who loses a case, the relevant question is whether the proceeding had reasonable prospects of success at the time it was instituted, not whether it failed.[18] Where a case fails due to an arguable point of law, it cannot be said that the proceeding was one brought without reasonable cause. This differs from a situation where, even on the plaintiff’s own version of events, the case must fail.[19]
[18]R v Moore; ex parte Federated Miscellaneous Workers’ Union of Australia (1978) 140 CLR 470 at 473
[19]See Kanan v Australian Postal and Telecommunications Union (1992) 43 IR 257 at 264-5 per Wilcox J which was approved in Council of Kangan Batman Institute of Technology and Further Education v Australian Industrial Relations Commission and Anor (2006) 156 FCR 275
26Where a successful applicant seeks costs against a losing defendant, the question is whether the defence run at trial had reasonable prospects of success, not whether it failed.
27The question of costs and section 570 of the FWA was considered by a five member bench of the Federal Court of Australia in Melbourne Stadiums Ltd v Sautner (“Sautner”).[20] In that case, the court held that where a proceeding was commenced in the County Court of Victoria and the plaintiff made claims under the FWA and at common law, the claims under the FWA were matters within section 570(1) of the FWA. As a result, the proceeding was one in relation to a matter arising under the FWA even though there were other claims in the proceeding unrelated to the FWA. Hence, section 570(1) operated to preclude the court from ordering the plaintiff to pay any costs incurred by Sautner in prosecuting his claim unless an exception in section 570(2) applied.[21]
[20](2015) 229 FCR 221. The Court relied upon the detailed judgment of White J in Stanley v Service To Youth Council Inc (No 3) (2014) 225 FCR 357 which tracked the legislative history and explanatory memoranda supporting the construction of section 570 of the FWA which the Full Court adopted.
[21] Ibid at [157] and [173]
28It is well established that a failure to accept a reasonable offer of compromise can constitute an unreasonable act for the purposes of section 570(2) and its predecessors.[22]
[22] Ibid at [166]
29But even where a party in a proceeding involving matters under the FWA makes a reasonable offer to compromise the litigation, it does not necessarily follow that the other party’s failure to accept was unreasonable.[23]
[23]Ibid at [167] referring to Alpine Hardwoods (Aust) Pty Ltd v Hardys Pty Ltd (No 2) (2002) 190 ALR 121 at 128 per Weinberg J
30It is relevant to also note the comments of the full Federal Court in Stratton Finance Pty Ltd v Webb[24] where the applicant, who made claims under the FWA and at common law for breach of contract, made a Calderbank offer to the other side. The court said that making such an offer presupposed the existence of a costs jurisdiction when section 570(1) meant that, subject to section 570(2), there was no such jurisdiction. The court said that where an offer applied to both common law contractual claims and FWA claims, the refusal of such an offer might be unwise or unreasonable but it did not follow that it was an unreasonable act or omission for the purposes of section 570(2).
[24](2014) 314 ALR 166
31This question has also been addressed more recently by Bromberg J in the case of Celand v Skycity Adelaide Pty Ltd (“Celand”).[25] His Honour said that the trial judge had held that, because Celand had rejected a reasonable offer of settlement, she had engaged in an act or omission which was unreasonable within section 570(2)(b) of the FWA. Bromberg J commented that it did not necessarily follow that rejecting a reasonable offer of settlement constituted an unreasonable act or omission within section 570(2)(b). He said that it was necessary to take all the relevant circumstances into account, not just the reasonable character of the settlement offer.[26]
[25](2017) 256 FCR 306 (FCAFC)
[26] Ibid at [163]
32Bromberg J drew a distinction between the unreasonable rejection of a Calderbank offer and unreasonable conduct within section 570(2)(b). His Honour said that in the context of awarding indemnity costs for rejecting a Calderbank offer, it was sufficient for the rejection to be unreasonable in the sense of imprudent. It was an act which was not based upon good sense or sound judgement.[27] His Honour said that the promotion of access to justice underlay the policy behind section 570 of the FWA. For that reason, the word “unreasonable” in section 570(2)(b) required that a higher standard of unreasonableness be adopted. Hence, the fact that a party had conducted litigation inefficiently or adopted a misguided approach would be relevant to, but not conclusive of, a party having acted unreasonably in the sense relevant to section 570(2)(b). The two different contexts demanded different standards of unreasonableness. Courts need to be aware of this when assessing whether the rejection of a reasonable settlement offer can properly be characterised as an “unreasonable act or omission”.[28]
[27] (2017) 256 FCR 306 at [165]
[28]Ibid
The Offers
First Offer
33The First Offer was made in June 2020. It purported to be made as an offer of compromise under Order 26 of the Rules. It offered to settle both the commercial claims and the employment claims for $200,000 plus party/party costs and disbursements. The defendants had 28 days in which to accept the offer. The plaintiffs acknowledged that this offer did not comply with Order 26. Nonetheless, the court is entitled to take account of the offer on the question of costs simply as a matter of discretion. The plaintiffs argued that this offer was a genuine compromise given that the amount sought at the time in the commercial claims was $265,431 and in the employment claims $105,800.65. They also contended that the judgment was no less favourable than the offer because the judgment on the commercial claim was $145,937.67 and on the employment claims $70,211.154, being a total of $216,118.21.
34There was no dispute that this offer lapsed without any response by the defendants.
Second Offer
35The Second Offer was a Calderbank offer under which the plaintiffs offered to settle all claims for $130,000 inclusive of costs with Creative Smiles also being released from an order made in February 2021 that it pay the defendants approximately $20,000 flowing from the earlier adjournment of the trial. At the time of this offer, the commercial claims were $265,431 plus interest and the employment claims $105,800.65 plus interest and penalties.
36The plaintiffs argued that when one took account of interest accrued to the time the offer was made, the judgment amount on the commercial claims was $155,075.16 and on the employment claims $73,962.16, a total of $229,037.32. The judgment was no less favourable than the Second Offer, which, again, the defendants ignored.
37The plaintiffs argued that the defendants acted unreasonably in rejecting the Second Offer because:
· it was clearly expressed and made at a time when it would have avoided the significant costs incurred by all parties at trial;
· it represented a significant compromise on the amount claimed;
· it was a significant compromise on what was awarded for the commercial claims alone without taking into account the possibility of Goodman succeeding on the employment claims;
· the offer foreshadowed the application for indemnity costs.
38Further, the plaintiffs contended that rejecting the Second Offer, especially after rejecting the First Offer, was an unreasonable act by the defendants. In this context, I note that the plaintiffs gave no additional reason to support their argument that the defendants’ conduct was “unreasonable” within the meaning in section 570(2)(b). Nor did the plaintiffs seek to differentiate between the levels of unreasonableness in the differing contexts of rejecting a settlement offer and the specific context provided by section 570(2)(b) of the FWA.
Third Offer
39The Third Offer complies with the requirements of Order 26 of the Rules and proposes a settlement of all claims for a combined total of $130,000 inclusive of costs. But this amount excluded the liability which Creative Smiles had for the sum of about $20,000 ordered against it in February 2021. It was said to be a significant compromise on the amount claimed and the judgment was no less favourable because it was notably better for Ekera than the trial outcome. Taking into account accrued interest to the date the Third Offer was made, the plaintiffs argued that the judgment amount on the commercial claims was $156,610.56 and on the employment claim was $74,597.49, a total of $231,208.05.
40For the same reasons referred to earlier, the plaintiffs alleged that the defendants’ rejection of the Third Offer constituted an “unreasonable” act for the purposes of section 570(2)(b) and justified costs orders on the employment claims.
41In summary, each of the Second and Third Offers were more generous to the defendant than the decision given by the court. Indeed, the First Offer probably was too but it was made notably earlier and substantial interest had accrued since June 2020.
42The defendants do not dispute that they failed to respond to, or accept, any of the offers made. As noted earlier, they say that by reason of section 570 of the FWA, no costs are payable. Further, they contend that they did not act unreasonably in rejecting the settlement offers made.
The prevailing circumstances
43I need to address the circumstances which the parties found themselves in at the times the various offers were made. A couple of matters stood out: the applicability of section 570 of the FWA and the perceived strength of the defendants’ defence.
44From the inception of the commercial claims and the employment claims in October 2019, there were proceedings in relation to a matter arising under the FWA within the terms of section 570(1) of the FWA.
45Initially, there were two separate actions on foot where one addressed the commercial claims, and the other the employment claims. Because of the factual background to the litigation in which all claims emanated from the same transaction and the same contractual documents, and the parties acknowledged that the Acquisition Agreement and Services Agreement incorporated the terms of the other agreement, there was always a close connection between the two proceedings. The case law indicates that where there are two actions, it is not necessary for the operation of section 570 of the FWA that there be FWA claims in both actions. It is sufficient that a party seeks relief under the FWA in one action and there is a relevant relationship between the subject matter in one case and the claim under the FWA in the other.[29] Thus, there was no dispute between the parties that section 570 applied to this litigation.
[29]See for example the discussion and cases referred to in BSA Ltd v Bradshaw (No 2) [2021] FCA 1182 at [7]-[10]
46As noted earlier, the cases were then consolidated in February 2020. Any alleged issues arising from having two separate proceedings thereupon disappeared. In my opinion, the comments of the full Federal Court in Joseph v Parnell Corporate Services Pty Ltd,[30] where the court treated the cross-claim as a separate proceeding, meant that there should have been no legal issue in any event.
[30] (2021) 284 FCR 546
47The prima facie presumption with section 570 of the FWA is that there will be no costs orders made. It is for this reason that such orders are rare. Both parties should have been aware of this.
48The second point is the defendants believed on objectively reasonable grounds that they had a strong case and they were unlikely to pay the plaintiffs much, if any, damages. The findings which confounded this outcome concerned the missing cash and Goodman’s status as an employee.
49The offers were made on 26 June 2020, 21 February 2021 and 7 April 2021. At all times up to and including trial, the defendants maintained that the court should deduct the missing cash of $132,909.04 when arriving at the EBITDA figure for Creative Smiles. At trial, the defendants relied upon the terms of the Acquisition Agreement and the view of the single joint expert Ferrier, who said that the financial impact of the missing cash should be taken into account when calculating the EBITDA, either as a reduction in revenue or as an expense of the practice.[31]
[31] See [416] of the principal reasons
50The method for calculating EBITDA was set out in clause 4.5(b) of the Acquisition Agreement. It excluded from the calculation any income or expenses not arising in the ordinary course of business of the practice. In the principal reasons, I summarised what I took to be Ferrier’s reasoning[32] and noted that it was important to Ferrier that the EBITDA calculation was being made in the context of an earn-out payment and not a valuation.
[32] See [418] of the principal reasons
51The plaintiffs sought and obtained leave to file and rely upon a report from their own expert, Brian Jones. The only purpose of his report was to take issue with Ferrier’s methodology in concluding that the missing cash was lost in the ordinary course of business and should be treated as an expense in calculating the EBITDA figure. Jones opined that the cash was not lost in the ordinary course of business – it was a rare event which did not occur on a frequent or annual basis.
52I noted that, during the course of his cross-examination, Jones agreed that if the purpose of the EBITDA calculation was to ascertain the actual financial performance of the Creative Smiles business and not to value the business, it was appropriate to take the missing cash into account.[33]
[33] See [427] and [433] of the principal reasons
53Notwithstanding the apparent agreement by the two experts on the point, I concluded that as a matter of construction, the missing cash fell within the exclusion in clause 4.5(b) as an expense not arising in the ordinary course of business.
54This outcome meant that until I found against Ekera on the point, the jointly appointed expert and then in cross-examination, the other expert, each supported the outcome for which Ekera had always contended and upon which it had acted. Thus, there was a sound basis for the approach which the defendants took.
55The principal reasons dealt at some length with my concerns regarding the possibility that Goodman was an employee and not an independent contractor.[34] Again, until I found for Goodman on this point, the defendants had strong grounds for considering that Goodman was an independent contractor. Ekera had sought legal advice from the reputable national law firm now known as Herbert Smith Freehills after Ekera had acquired its first dental practice. Herbert Smith Freehills produced a template for future purchases whereby the vendor dentist became an independent contractor under the Services Agreement after the acquisition was complete.
[34] See [479] - [517] of the principal reasons
56It should also be borne in mind that due to the High Court decisions of Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd[35] and ZG Operations Australia Pty Ltd v Jamsek[36] handed down in February 2022, the law regarding employees and independent contractors was altered. These decisions were published after the conclusion of the trial and, as a result, the parties were given a further opportunity to make submissions about the new state of the law and how it affected this litigation.
[35] [2022] HCA 1
[36] [2022] HCA 2
57In addition, Ekera also took advice from Liquid HR about the template and other ongoing issues as and when they arose. This is a continuing relationship because Ekera is keen to ensure that the company meets its legal obligations and complies with relevant industrial awards and employment regulations.
58Next, clause 13 of the Services Agreement expressly stated that there was no employment relationship between Goodman and Ekera.
59Finally, at no time when negotiating the Acquisition Agreement and Services Agreement, or later throughout the time he worked for Ekera, did Goodman suggest that he was an employee and should be paid as an employee in accordance with the applicable industrial awards.
60Again, on the basis of these factors, there was a strongly reasoned basis for the approach which the defendants took to the settlement offers.
61At the time that the plaintiffs made the First Offer, pleadings were closed and the plaintiffs had filed Further and Better Particulars of the Statement of Claim in proceeding CI-19-04997. It seems the parties made discovery and should have been preparing for a trial in late July 2020. However, it appears that the parties were far from ready for trial and were not in command of all the relevant issues or material. The trial was later adjourned to 20 January 2021 and then again to 1 February 2021 and finally to August 2021
62When the Second Offer was served, the parties had prepared for a trial scheduled for February 2021. The plaintiffs’ final offer came in April 2021 before the trial in August 2021.
63With one exception, the parties should have been well informed about the issues at stake and the documentary evidence by the time of receipt of the Second and Third Offers. The level of preparation and the extent to which the parties were familiar with the issues in June 2020 looks rather more problematic. The exception is the damages issue which I address in paragraphs 74-76 below.
Should the defendants have accepted any of the settlement offers?
64The First and Second Offers were either in fact, or analogous to, Calderbank offers. The critical question is whether the defendants acted unreasonably in rejecting them.
65In my opinion, the defendants were not unreasonable in refusing the First and Second Offers. I so find for a number of reasons.
66First, there was a prominent claim by one of the plaintiffs under the FWA such that, in the context, the parties should have understood that section 570 of the FWA applied to this litigation. As a result, subject to the exception in section 570(2)(b), there would be no orders for costs in relation to this proceeding. To that extent, where any offer contemplated that the defendants should pay any amount for costs, either explicitly or indirectly, it was consistent with the FWA for the defendants to argue that no such payment was appropriate.
67Secondly, for reasons I have already discussed, when these two offers were made, the defendants had strong grounds for believing that they had good prospects of success in defending the claims brought against them. I consider it unlikely that the defendants expected me to interpret the Acquisition Agreement differently from the expert witnesses or to adopt a position on Goodman’s employment status different from Herbert Smith Freehills and Liquid HR and the terms of the agreement itself.
68Thirdly, although there is no requirement that a Calderbank offer set out a rationale explaining why it is appropriate or in the best interests of the offeree to accept the compromise offer, it is fair to say that the provision of an explanation strengthens the submission that the refusal to accept was unreasonable. Especially is this so when: (a) the reasons for decision mirror the explanation given by the offeror; (b) the litigation is complex and there is a substantial amount of material.[37] In the present case, the plaintiffs provided no rationale to the defendants for accepting their offer.
[37]In this case, for example, the Statement of Claim was 48 pages, the Defence was 70 pages and the Court Book comprised about 3,650 pages.
69Fourthly, the second defendant, Coulepis, adopted a realistic assessment of his position regarding settlement given that he was found not to have any liability to the plaintiffs. That being so, it was reasonable that he was unwilling to compromise. The offers were effectively to both defendants, so the position was more complicated. In effect, it required both defendants to agree on a course of action or one defendant to act unilaterally for both of them. Likewise, the offers dealt with the commercial claims and the employment claims together without differentiation. This also complicated settlement in the circumstances due to the operation of section 570 of the FWA and the inability to address just one area of this dispute. The bundling together of the offers to the defendants made their refusal more reasonable.
70Fifthly, from the defendants’ perspective, the extent of the compromise offered by the plaintiffs was not that substantial. The First Offer assumed major success for the plaintiffs on issues such as the missing cash (being the single largest amount in issue in the case) and the question of employee status. This required the defendants to capitulate more than to compromise. The Second Offer was an improvement in this regard but still assumed substantial success for the plaintiffs on either one of these claims and/or some other damages claim in the proceeding.
71Sixthly, the defendants displayed sound judgement in assessing major parts of the case. Ultimately, the plaintiffs failed on heavily contested claims for breach of contract, misleading and deceptive conduct, damages for loss of opportunity and damage to reputation. These issues consumed considerably more of the court’s time and attention at trial than the issues of the missing cash and Goodman’s working status.
72In the above circumstances, I find that it was reasonable for the defendants to reject the First and Second Offer made by the plaintiffs.
73In reaching this view, I accept that:
· the terms of the offers were clear;
· the 28 day period to accept the First Offer was generous while the four days allowed for acceptance of the Second Offer was short in the context of such a substantial case.
74The Third Offer was made in April 2021. This was soon after the trial scheduled for 1 February 2021 was vacated and refixed for hearing on 10 August 2021. By the time this offer was made, the parties should have been conversant with the main issues to be addressed at the hearing. However, in saying this, I note that one important matter excluded from this was the question of damages.
75In orders made by Judge Marks on 18 February 2021, her Honour provided that expert evidence in relation to the calculation of loss and damage claimed by the plaintiffs was to be addressed in a report by a single joint expert engaged under section 65L of the Civil Procedure Act 2010. The orders laid out a timetable for production of the report. The expert was asked to provide the report to the parties by 30 May 2021. Judicial Registrar Burchell extended this order on 21 April 2021 to 25 June 2021, Judge Woodward, on 3 June 2021, extended this to 2 July 2021, and Judge Marks, on 7 July 2021, extended it to 23 July 2021. Ultimately, Ferrier did not produce his first report until 4 August 2021. On 7 August 2021 he then did a supplementary report which arose from questions raised by the parties regarding the draft of the original report. Jones prepared a report dated 15 August 2021.
76To that extent, all the offers were defective because they were made in a context where there was no expert evidence about damage, in particular the question of the missing cash.[38] Given its significance in the litigation, this was a major omission.
[38]I note that from at least November 2019, the defendants maintained that, in calculating the EBITDA, the missing cash was to be taken into account as a reduction in revenue or as an expense.
77The Third Offer was made pursuant to Order 26 of the Rules and the plaintiffs achieved a better result in the judgment. That being so, there is a rebuttable presumption that the plaintiffs are entitled to indemnity costs after service of the offer unless the court otherwise orders. The party on whom such an offer of compromise was served would ordinarily carry a heavy burden to displace the presumption. A court can depart from the presumptive position but only for good cause. This would generally arise only in an exceptional case. The mere fact that a party acted reasonably in rejecting an offer of compromise under Order 26 is not of itself sufficient to displace the usual operation of the rule.[39]
[39]See IFTC Broking Services Limited v Commissioner of Taxation (2010) 268 ALR 1 (FCAFC); Futuretronics.com.au Pty Ltd v Graphix Labels Pty Ltd [2009] FCAFC 40
78In the present case, the critical factor is the applicability of section 570 of the FWA to the litigation, a fact accepted by all parties. I have commented elsewhere that when negotiating the Acquisition Agreement and Services Agreement and then while working at Creative Smiles between July 2016 and February 2018, Goodman did not allege or contend that he was an employee of Ekera. His employment claims were raised belatedly, more than a year after he had ceased work at Creative Smiles.[40] Given that this claim was not something at the forefront of Goodman’s concerns when he worked at Creative Smiles, I infer that Goodman and his legal advisors gave careful thought to the question of raising claims against Ekera under the FWA before doing so. As part of the lawyers’ due diligence in examining these potential FWA claims, I would have expected them to come across references to section 570 of the FWA and its operation. When researching the law to write the principal reasons, I saw such references.
[40]It appears that the employment claims were first raised in a letter from Sharrock Pitman Legal to Ekera dated 3 April 2019.
79The above explains why the case of Melbourne Stadiums Ltd v Sautner[41] is important in this context. First, it is a decision of an appellate court from a decision at first instance by a judge of the County Court. Secondly, the appellate court comprised five and not the usual three judges. Thirdly, the court specifically found that the no cost jurisdiction created by section 570 encompassed the whole of a proceeding even if that proceeding included not only claims under the FWA but claims at common law. Accordingly, from the time that Goodman made the claims against Ekera under the FWA, he and (because he was the sole director and shareholder) Creative Smiles knew, or should have known, that conducting this claim in conjunction with the commercial claims was likely to have major costs consequences for the parties to the litigation – namely, the presumption was that there would be no order for costs.
[41] (2015) 229 FCR 221
80Notwithstanding this potentially significant consequence, it was the plaintiffs’ former solicitor, Michael Stapleton, who by email dated 17 February 2020 wrote to the County Court asking that the two proceedings, CI-19-04997 and CI-19-04993, be consolidated by consent as the litigation involved issues arising from two agreements dealing with the same subject matter. In my view, this put beyond doubt the position that section 570 of the FWA would govern this court proceeding.
81In the circumstances set out above, I consider that the court has good grounds to “otherwise order”. It is acting consistently with the authoritative ruling of a superior court and there are no countervailing factors sufficient to override the approach taken in Sautner[42] or to apply an exception.
[42](2015) 229 FCR 221
Does the exception in section 570(2)(b) apply?
82In my opinion, the exception in section 570(2)(b) does not apply to justify an award of costs in favour of the plaintiffs as a result of an “unreasonable act or omission” caused by the defendants.
83I have already examined why I consider that:
· the defendants were justified in refusing, and did not unreasonably reject, the First and Second Offers of settlement by the plaintiffs;
· even though the outcome in the principal reasons bettered the Third Offer made by the plaintiffs, it is appropriate for the court to otherwise order within Order 26.08(2) due to the operation of the FWA.
84The plaintiffs’ main argument for activating the exception in section 570(2)(b) seemed to be that it was unreasonable for the defendants to reject each of the three settlement offers made to resolve the litigation.[43] Although one might criticise the defendants’ failure to respond to the offers, when one examines the prevailing circumstances, it can be readily seen that the defendants had good reasons not to accept the offers. This means that they did not act unreasonably. Accordingly, especially given the higher threshold of unreasonableness spoken of in Celand’s case,[44] there was no relevant unreasonable act or omission for the plaintiffs to rely upon.
[43]See plaintiffs’ costs submissions at [22], [30]-[31], [37], [40] and [42]
[44](2017) 256 FCR 306
85Because I made the findings set out in paragraph 83 above, I regard the conduct of the defendants in relation to the three settlement offers as reasonable. Therefore, there is no unreasonable act or omission which can be attributed to the defendants for the purposes of the exception in section 570(2)(b). Such an act or omission must be significant in the context because the authorities have said that, even if a party unreasonably rejects a settlement offer, that of itself will not necessarily constitute an unreasonable act or omission for the purposes of section 570(2)(b) of the FWA.
Conclusion
86For the reasons set out I find that there should be no order as to costs as between the parties to this proceeding (and so far as it might be relevant, to proceeding CI-19-04993 before it was consolidated with this proceeding).
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