LADAKH PTY LTD V QUICK FASHION PTY LTD & ANOR (NO.2)
[2011] FMCA 712
•21 October 2011
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| LADAKH PTY LTD V QUICK FASHION PTY LTD & ANOR (NO.2) | [2011] FMCA 712 |
| COSTS – Separate issue – Calderbank offers – offer of compromise – indemnity costs – applicant’s conduct of proceeding – costs on Federal Court scale. |
| Federal Court Rules O.23 r.11(6) (repealed) Federal Court Rules 2011 rr. 1.04, 25.14 |
| Black v Tomislav Lipovac BHNF Maria Lipovac (1998) 217 ALR 386; [1998] FCA 699 Calderbank v Calderbank [1976] Fam 93; [1975] 3 All ER 333; 3 WLR 586 Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225; (1993) 118 ALR 248; [1993] FCA 536 Cretanzo v Lombardi (1975) 13 SASR 4 Ron Englehart Pty Ltd v Enterprise Constructions (Aust) Pty Ltd & Anor (No 2) (2010) 88 IPR 622; [2010] FCA 1168 |
| Applicant: | LADAKH PTY LTD (ACN 079 120 595) |
| First Respondent: | QUICK FASHION PTY LTD (ACN 126 154 890) |
| Second Respondent: | FENG JIANG |
| File number: | MLG 669 of 2010 |
| Judgment of: | Riley FM |
| Hearing date: | By way of written submissions |
| Date of last submission: | 14 September 2011 |
| Delivered at: | Melbourne |
| Delivered on: | 21 October 2011 |
REPRESENTATION
| Advocate for the Applicant: | Mr Watson |
| Solicitors for the Applicant: | Middletons |
| Counsel for the First Respondent: | Ms Gatford |
| Solicitors for the First Respondent: | Clayton Utz |
| Counsel for the Second Respondent: | Ms Gatford |
| Solicitors for the Second Respondent: | Clayton Utz |
ORDERS
The applicant pay the respondents’ costs of the proceeding on the Federal Court scale, to be taxed if not agreed.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE |
MLG 669 of 2010
| LADAKH PTY LTD (ACN 079 120 595) |
Applicant
And
| QUICK FASHION PTY LTD (ACN 126 154 890) |
First Respondent
And
| FENG JIANG |
Second Respondent
REASONS FOR JUDGMENT
Introduction
This is an application for costs arising from a copyright matter. The substantive application was dismissed following a hearing that lasted five days. The court has a very wide discretion in relation to costs, although the discretion should be exercised judicially and in accordance with principle.
The applicant seeks orders that:
a)the respondents pay on an indemnity basis the applicant’s costs incurred after 2 December 2010 in connection with proving that copyright subsists in a certain work; and
b)the applicant otherwise pay the respondents’ costs on the scale of this court.
The respondents seek orders that:
a)the applicant pay the respondents’ costs on an indemnity basis;
or, in the alternative
b)the applicant pay:
i)the first respondent’s costs up to 30 June 2010 on a party/party basis and thereafter on an indemnity basis; and
ii)the second respondent’s costs on an indemnity basis;
or, in the alternative
c)the applicant pay:
i)the first respondent’s costs up to 14 November 2010 on a party/party basis and thereafter on an indemnity basis; and
ii)the second respondent’s costs on an indemnity basis;
or, in the alternative
d)the applicant pay the respondents’ costs on a party/party basis as agreed or taxed on the Federal Court scale.
Proof of copyright subsistence
The applicant lost the case overall but won on the point of copyright subsistence. That was a separate and discrete issue. The applicant said that it put the respondents on notice by letter dated 2 December 2010 about the factual and legal matters that led to a probability of the applicant succeeding on that issue. Consequently, the applicant argued, the respondents should pay the applicant’s costs relating to that issue on an indemnity basis.
The applicant noted that in Hughes v Western Australian Cricket Association (1986) ATPR 40-748 at 48,136, Toohey J (sitting in the Federal Court) noted that:
a)in the absence of special circumstances, costs follow the event;
b)the costs order should reflect the degree of success attained; and
c)a successful party may be ordered to pay some costs in respect of unsuccessful aspects of the case.
The applicants also noted that, in Bowen Investments Pty Ltd v Tabcorp Holdings Ltd (No 2) [2008] FCAFC 107, Finkelstein and Gordon JJ said:
3 We think there is force in the argument that the appellant should not benefit from the usual rule that costs follow the event. For many years the traditional rule has been that the winner (once the winner is properly identified) is entitled to recover his costs of the trial. It sometimes happens that there is a departure from the traditional rule and the costs order takes account of the success of the parties on particular issues. But to date the award of costs on an issue by issue basis has only been accepted in limited cases and then only when the circumstances are exceptional.
4 This approach is, if we may be permitted to say so, quite unfair. Its effect is that a winner is entitled to all of his costs even if he raises a plethora of issues on which he is unsuccessful. The unfairness of the traditional rule has been recognised in England where, following Lord Woolf’s interim report, Access to Justice (June, 1995) [at para 25.22], the Civil Procedure Rules were modified to require the judge to have regard to the circumstance (if it occurs) that the unsuccessful party has succeeded on some issues: see r 44.3(4)(b). In Western Australia, the Supreme Court Rules provide that costs should follow the event of each pleaded cause of action: see r 66(2)(a). This is narrower than the English approach but certainly more reasonable than adherence to the traditional rule.
5 We do not believe there is any need to wait for a change in the Federal Court Rules to adopt an issue by issue approach here. Costs are in the court’s discretion. Fairness should dictate how that discretion is to be exercised. So, if an issue by issue approach will produce a result that is fairer than the traditional rule, it should be applied. It is not suggested that such an approach requires a precise arithmetical apportionment of the costs as between the winner and loser of discrete issues. No doubt the assessment will often be rough and ready. But it will have the virtues of both fairness and reasonableness, which are often lacking in the application of the traditional rule.
6 At trial the appellant pleaded a case in tort (for waste), for rectification of the lease, for breach of ss 52 and 53(g) of the Trade Practices Act 1974 (Cth) and for breach of ss 51AA and 51AC of that Act. In each of those causes of action it failed. On the other hand, much of the evidence tendered, not only by the appellant but also by the respondent, was relevant to the single cause of action upon which the appellant was successful both at trial and on the appeal (its claim for breach of contract). Put another way, if the appellant had confined its claim to the cause of action upon which it succeeded, the work involved in both preparing for trial and the trial time itself would not have been substantially different. In these circumstances it is, in our view, reasonable to deprive the appellant of 30 per cent of its trial costs. It would be perverse to impose upon the appellant any obligation to pay the respondent a portion of its costs and we would decline to make any order to that effect.
In Bowen, the applicant argued numerous distinct legal issues on all but one of which it did not succeed. However, much of the evidence was common to both the successful and the unsuccessful issues. Ultimately, the applicant was allowed only 70% of its costs of the trial.
The present case is somewhat different. The proof of copyright subsistence was an integral part of the applicant’s case. That is, if the applicant had not succeeded on that issue, it could not have succeeded at all. Unlike Bowen, there was nothing untoward about the applicant raising that issue. On the contrary, the applicant’s argument is that the respondents behaved inappropriately in putting the applicant to its proof on an issue that the applicant was likely to win.
The applicant also relied on Ron Englehart Pty Ltd v Enterprise Constructions (Aust) Pty Ltd & Anor (No 2) (2010) 88 IPR 622; [2010] FCA 1168 at [12], where Jessup J said:
I consider that the respondents are here inappropriately connecting the question of subsistence with the questions of access, and therefore, of reproduction. In the statement of [its] claim as it stood from time to time, the applicant made it clear what were the works upon which it relied and, by correspondence dated 9 March 2010, it made a proposal to the respondents, which was not unreasonable in the circumstances, that time and costs should be saved by the respondents making appropriate concessions. In the result, the respondents did not challenge the applicant’s claim to copyright in the works upon which it sued. In effect, they put the applicant to its proof, in circumstances where there never was any plausible basis upon which they might resist the proposition that copyright subsisted. Although this was part of the applicant’s case — a case which ultimately failed on other grounds — I consider it to be consistent with the need for efficiency in contemporary litigation that a respondent should make concessions where appropriate. The present was, in my view, such an occasion.
I note that in Englehart, Jessup J went on to say, at [13] and [14]:
13.… Second, I would not require the respondents to pay the applicant’s costs incurred before the passing of a reasonable period after the making of the subsistence allegations in question. Since the basis of my award of costs in favour of the applicant is that the respondents, acting reasonably, ought to have conceded those allegations, it follows that the costs which the applicant will get under this heading must be confined to those that were incurred after the point at which the respondents, acting reasonably, ought to have made the relevant admissions.
14.The applicant also submits that its costs of making good its subsistence allegations should be taxed on an indemnity basis, for the reason that the respondents’ refusal to make the necessary concessions was unreasonable, and caused substantial delay and expense. It is not at all apparent to me, however, how the respondents’ conduct of their case in relevant respects caused delay and, to the extent that it caused the applicant expense, the applicant will have its costs in the normal way, in accordance with the determinations which I have made above. I could not hold that the respondents were acting unreasonably to withhold the concessions which the applicant sought, since they were entitled to proceed in that way. The basis upon which I shall award costs against the respondents in these areas is that they chose to keep the subsistence point in contest, when there was no realistic basis upon which to anticipate success in relevant respects. Thus the costs incurred in the establishment of the applicant’s case should be to the respondents’ account. But I would not go further and hold that this was a course which the respondents could, on no view, reasonably have adopted, or that they should be criticised in the strong terms conventionally associated with an indemnity costs order. These costs should, therefore, be taxed on the conventional basis.
In the present case, unlike Englehart, I do not think it can be said that “there was never any plausible basis” upon which the respondents could resist the claim of copyright subsistence. There was evidence which indicated that the unusual drawing in this case was very similar to an original work by another designer, and there was authority which arguably supported the respondents’ position. Moreover, the applicant did not put on evidence from its designer which addressed the similarity with another drawing until the first day of the trial. Consequently, I do not consider that the present case is factually similar to Englehart.
However, the point made in Bowen remains. In that connection, the respondents relied on the judgment of Goldberg J in Dr Martens Pty Ltd v Figgins Holdings Pty Ltd (No 2) [2000] FCA 602. In that case, his Honour referred with approval to Cretanzo v Lombardi (1975) 13 SASR 4 at 12 where Jacobs J said:
53.… But trials occur daily in which the party, who in the end is wholly or substantially successful, nevertheless fails along the way on particular issues of fact or law. The ultimate ends of justice may not be served if a party is dissuaded by the risk of costs from canvassing all issues, however doubtful, which might be material to the decision of the case. There are, of course, many factors affecting the exercise of the discretion as to costs in each case, including in particular, the severability of the issues, and no two cases are alike. I wish merely to lend no encouragement to any suggestion that a party against whom the judgment goes ought nevertheless to anticipate a favourable exercise of the judicial discretion as to costs in respect of issues upon which he may have succeeded, based merely on his success in those particular issues.
Goldberg J in Dr Martens went on to say:
54.… A court should not be too ready to disallow costs simply because a party has failed upon an issue, unless it be quite a separate and distinct issue from the issues in respect of which it succeeded or unless there be some element of unreasonableness or inappropriate conduct in relation to that issue ….
In the present case, the issue of copyright subsistence was, in a sense, separate and distinct from the issues on which the respondent succeeded. However, the applicant had to succeed on copyright subsistence to be able to succeed at all. In that sense, the issue of copyright subsistence was part and parcel of the overall claim.
It was entirely reasonable for the respondents to require proof of the applicant’s claim to have copyright in the work in question, particularly as it was so similar to an existing work by another designer. Although the respondents had squarely raised the issue of copyright subsistence in a letter dated 23 December 2010, the applicant did not provide the relevant evidence until the first day of the hearing, on 7 March 2011, in the form of a second affidavit made by the applicant’s designer, Mr Kourhani. Given the considerable similarities between applicant’s work, and the work of another designer, it was entirely reasonable for the respondents to test that evidence.
The first point at which the respondents could have reasonably been satisfied that copyright subsistence was established by the applicant was at the point of preparing final written submissions. However, at that stage, the respondents evidently considered that they had a good argument, based on recent authority, that the similarities between the applicant’s work, and the pre-existing work, were too great for copyright to subsist in the applicant’s work. The respondents’ arguments on that point were not ultimately accepted. However, there was nothing unreasonable or inappropriate in running them.
All in all, to the extent that Bowen differs from Dr Martens, I accept that Bowen must prevail. It is recent authority of the Full Federal Court, whereas Dr Martens reflects a more traditional approach.
However, the touchstone of Bowen is fairness, to all parties. It seems to me that the fairest course in this case is not to allow the applicant its costs of the copyright subsistence issue. That issue was an integral part of the applicant’s case, in the sense that it had to prove that issue to succeed at all. The applicant only provided the relevant evidence on the first day of the hearing. It was entirely reasonable for the respondents to test that evidence. Consequently, in my view, the applicant could only, on any view, have a reasonable claim for costs relating to its final written submissions on this issue. However, the legal arguments in support of the respondents’ position were cogent.
It was more than reasonable to run them.
I would also add that, in my view, the applicant’s claim for indemnity costs on the copyright subsistence issue was extraordinary. The passage quoted above from Englehart shows that, even in that case, indemnity costs were not within the bounds of reasonable possibility. There is obviously a very significant difference between setting out, in a letter, the facts on which a claim is made, and providing sworn or affirmed evidence supporting that claim.
The costs of the proceeding
The respondents seek orders that the applicant pay their costs, or part of them, on an indemnity basis, by reason of the applicant’s rejection of various settlement offers and by reason of the applicant’s conduct of the case.
a. The offer of 1 July 2010
The respondents’ first offer was made by letter dated 1 July 2010. It was expressed to be a Calderbank offer that was open for 14 days. It said that, if the offer was refused, the respondents would seek indemnity costs from the date of the letter. It offered to settle the case on the basis that the respondents would:
a)pay the applicants $1,000 plus costs as taxed or agreed;
b)deliver to the applicant certain articles;
c)provide to the applicant a statutory declaration setting out certain information about the garments in question and the profit on their sale.
The Full Federal Court considered the effect of the refusal of a Calderbank offer in Black v Tomislav Lipovac BHNF Maria Lipovac (1998) 217 ALR 386; [1998] FCA 699 at [217] and [218] where the court said:
[217]There is a line of authority in the Federal Court supporting the proposition that the mere refusal of a Calderbank offer does not of itself warrant an order for indemnity costs and the offeror needs to show the conduct of the offeree was unreasonable. The cases are WCW Pty Ltd v Charthill Ltd (unreported, Fed C of A, Olney J, No QG5/92, 7 July 1992, BC9203587); John S Hayes & Associates Pty Ltd v Kimberley-Clark Australia Pty Ltd (1994) 52 FCR 201 per Hill J, Sanko Steamship Co Ltd v Sumitomo Australia Ltd (unreported, Fed C of A, Sheppard J, No GO82/91, 7 February 1996, BC9600133); MGICA v Kenny (1996) 70 FCR236 ; 140 ALR 707 per Lindgren J; Fasold v Roberts (unreported, Fed C of A, Sackville J, No NG942/92, 11 September 1997, BC9704250). To the contrary is the decision of Rolfe J in the Supreme Court of New South Wales in Multicon Engineering Pty Ltd v Federal Airports Corp (unreported, SC(NSW), Rolfe J, No 55004/91, 20 June 1996, BC9602511). His Honour considered that the non-acceptance of an offer more favourable to the offeree than the judgment ultimately awarded prima facie demonstrated unreasonable conduct and the offeree bore the onus of showing why indemnity costs should not be ordered.
[218]In reality there is not a substantial difference between the two views; both accept that the reasonableness of the conduct of the offeree, viewed in the light of the circumstances which existed when the offer was rejected, is relevant to the exercise of the discretion to award indemnifying costs. To the extent there is a difference, we would prefer the by now well established line of authority in decisions of single judges of this court. However, we would not, with respect, necessarily endorse the view of Sheppard J in Sanko that the conduct of the offeree has to be “plainly unreasonable”. To adopt an especially high standard of unreasonableness would operate as a fetter on the discretion to award indemnity costs and diminish the effectiveness of the Calderbank offer as an incentive to settlement. There is in our view force in the comments of Byrne J in the Supreme Court of Victoria in Mutual Community Ltd v Lorden Holdings Pty Ltd (unreported, SC(Vic), Byrne J, No 10561/90, 28 April 1993, BC9303878) at 12–13:
The policy of the court is to encourage litigating parties to undertake genuine settlement negotiations and, for that purpose, to face up to serious offers of settlement …
The response of a litigant in receipt of an offer of settlement will always be affected by the prospect that the sum which the court might order including party and party costs may be less advantageous than the terms of the offer. Experience, however, shows that this prospect alone is not always sufficient to compel a litigant to face up to the offer. The further prospect of a super-added costs penalty if a reasonable offer be not accepted is a salutary inducement to an offeree to undertake this often painful task.
The Victorian Court of Appeal more recently considered the effect of the refusal of a Calderbank offer in Hazeldene’s Chicken Farm Pty Ltd v Victorian Workcover Authority (No 2) (2005) 13 VR 435; [2005] VSCA 298. Warren CJ, Maxwell P and Harper AJA said at [18] to [28] (citations omitted):
18One of the seminal contributions to the law on indemnity costs was the judgment of Sheppard J in Colgate Palmolive Co v Cussons Pty Ltd. Amongst the circumstances listed by his Honour as having been thought to warrant the exercise of the discretion to award indemnity costs was:
… an imprudent refusal of an offer to compromise.
So widely has this been accepted that the proposition has been advanced that a Calderbank offer gives rise to a presumption that the party rejecting the offer should pay the offeror’s costs on an indemnity basis if the offeree receives a less favourable result.
19In OCBC, however, Redlich J rejected the notion of any such presumption, holding that the weight of authority:
… strongly points to an approach that involves no preconceptions about when the rejection of a Calderbank offer should lead to the making of a special costs order. It will do so where it is concluded that the rejection of the offer was unreasonable.
We respectfully agree with his Honour’s conclusion. We note, as did his Honour, that the notion of such a presumption has been decisively rejected by the New South Wales Court of Appeal (most recently in Brymount Pty Ltd v Cummins (No 2)), by the Federal Court and by the Queensland Court of Appeal.
20The correct approach, in our view, is to treat the rejection of a Calderbank offer as a matter to which the court should have regard when considering whether to order indemnity costs. As Gyles JA stated in SMEC Testing Services Pty Ltd v Campbelltown City Council:
… In the end the question is whether the offeree’s failure to accept the offer, in all the circumstances, warrants departure from the ordinary rule as to costs …
Encouraging settlement
21In Grbavac v Hart, - 27#27 Hayne JA cited with approval what the New South Wales Court of Appeal had said in Maitland Hospital v Fisher (No 2) about the policy rationale underlying the availability of special orders for costs where offers of compromise are rejected. Like his Honour, we think that what was there said is equally relevant to the exercise of the costs discretion where a Calderbank offer has been made. The policy objectives were said to be:
(1)To encourage the saving of private costs and the avoidance of the inherent risks, delays and uncertainties of litigation by promoting early offers of compromise by defendants which amount to a realistic assessment of the plaintiff’s real claim which can be placed before its opponent without risk that its “bottom line” will be revealed to the court;
(2)To save the public costs which are necessarily incurred in litigation which events demonstrate to have been unnecessary, having regard to an earlier (and, as found, reasonable) offer of compromise made by a plaintiff to a defendant; and
(3)To indemnify the plaintiff who has made the offer of compromise, later found to have been reasonable, against the costs thereafter incurred. This is deemed appropriate because, from the time of the rejection or deemed rejection of the compromise offer, notionally the real cause and occasion of the litigation is the attitude adopted by the defendant which has rejected the compromise. In such circumstances that party should ordinarily bear the costs of litigation.
22At the same time, as Redlich J said in OCBC, there are other competing objectives of equal importance.
… Potential litigants should not be discouraged from bringing their dispute to the courts. It is such considerations which underlie the general rule that an order for special costs should only be made in special circumstances.
The test of unreasonable rejection
23In 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.
24Of course, deciding whether conduct is “reasonable” or “unreasonable” will always involve matters of judgment and impression. These are questions about which different judges might properly arrive at different conclusions. As Gleeson CJ said recently, “unreasonableness is a protean concept”. But a test of reasonableness is, we think, entirely appropriate to the exercise of a discretion such as this.
Factors relevant to assessing reasonableness
25The discretion with respect to costs must, like every other discretion, be exercised taking into account all relevant considerations and ignoring all irrelevant considerations. It is neither possible nor desirable to give an exhaustive list of relevant circumstances. At the same time, a court considering a submission 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 to 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;
(f) whether the offer foreshadowed an application for an indemnity costs in the event of the offeree’s rejecting it.
26It has been argued on occasion that the maker of a Calderbank offer should not be entitled to costs unless the offer sets out, with some reasonable specificity, the basis for the offeror’s contention that the offeree should accept the compromise — for example, because the offeree’s case was hopeless or because the offeree had no reasonable prospects of doing better in the proceeding than was being offered in advance.
27Once again, we think it neither necessary nor desirable to lay down any general rule in this regard. We agree with what Redlich J said in OCBC, as follows:
Any attempt to prescribe the reasoning which must accompany [a Calderbank] offer should be resisted. Whether there is a need for the offeror to descend to specificity as to why the offer should be accepted must depend upon a consideration of all of the circumstances existing at the time of the offer. The extent to which the weakness of a party’s position is exposed through the pleadings, affidavits and the various communications between the parties during the course of the litigation may bear upon the significance of the absence of specificity in the informal offer.
28As we said at the outset, the unreasonable refusal of an offer of compromise is, by itself, a proper ground for the award of indemnity costs or — in the present case — the award of solicitor-client costs. It follows that it is not necessary for the applicant for such an order to establish matters which might be relevant to other, well-recognised, grounds for indemnity costs. Once again we would adopt what Redlich J said in OCBC, as follows:
It is not necessary to establish misconduct by the offeree before the rejection of the offer can be viewed as unreasonable. Lack of merit in the way a party has conducted its case is not a prerequisite for the making of an indemnity costs order [on this ground].
The respondents’ offer of 1 July 2010 was made at an early stage of the proceeding. The offer expired before the respondents had provided discovery or their affidavits of evidence. The time allowed to the offeree to consider the offer was 14 days. The extent of the compromise offered was considerable. The net effect of the offer, including costs, was about $20,000. The applicant had claimed damages but had not specified in documents filed with the court how much was claimed. In response to the offer of 1 July 2010, the applicant said it would accept $80,000, various undertakings and the delivery of certain items. The $80,000 was less than the applicant claimed it would be awarded. It claimed it would be awarded about $2,000 for lost sales, $35,000 for general damages for loss of reputation and $75,000 for additional damages. The offeree’s prospects of success, as at 1 July 2010, were not great. The applicant had evidence that the first respondent had imported clothing made out of fabric apparently copied from the applicant’s fabric, but had no evidence that the respondents were responsible for any copying. The terms of the offer were very clear. The offer foreshadowed an application for indemnity costs.
The applicant argued that it was reasonable for it to reject the offer of 1 July 2010. The applicant said that:
a)as at 1 July 2010, the respondents had produced no evidence to support their claim that they sourced the fabric in a fabric market in China; and
b)the applicant manufactured its garments in its own factory in China.
The second point, which was presumably intended to show that the applicant’s copyright was secure in China, in fact shows that the applicant was mistaken about its own case. It became apparent during cross examination that the applicant did not own a factory in China. The fabric for the applicant’s garments was cut in a factory owned by a related third party, but the garments were sewn elsewhere by outworkers. There were numerous points where leakage of the applicant’s design could have occurred.
The applicant noted that the offer dated 1 July 2010 did not include any offer to refrain from dealing in the applicant’s fabric design. The applicant said that the offer did not, therefore, represent a true compromise of the applicant’s claim. However, the respondents had made it clear from the outset that they were not interested in making any more garments from the fabric in question. If this had been a genuine sticking point, I do not doubt that the offer would have been amended to include it.
Finally, the applicant argued that the present case was relevantly similar to Fyna Foods Australia Pty Ltd v Cobannah Holdings Pty Ltd (No 2) [2004] FCA 1212. In that case, Kenny J noted at [9] that, as the respondent had not provided its affidavits before the offer expired, the applicant was not:
afforded any realistic opportunity to consider the strength or otherwise of the respondent’s position vis á vis its own.
On the other hand, the respondents argued that indemnity costs should be ordered against the applicant, not only because of the unreasonable refusal of an offer that was not bettered, but because of the manner in which the applicant conducted the proceeding. Most of the conduct relied on by the respondents occurred well after the offer of 1 July 2010. The only conduct complained of that had occurred at the time of the offer of 1 July 2010 was the maintenance of largely unparticularised claims against each of the respondents despite the absence of any direct evidence of copying and despite the applicant’s later concession that leakage of customer’s designs occurs in China.
It is clear that, as at the expiry of the offer dated 1 July 2010, the applicant had scant evidence to support its claim. However, equally, the applicant did not have the benefit of the respondents’ affidavit material to permit a realistic assessment of the case as a whole.
Taking into account all of these matters, I am not persuaded that the applicant’s refusal of the offer dated 1 July 2010 was so unreasonable that the applicant ought to be ordered to pay the respondents’ costs on an indemnity basis from that date.
b. the offer dated 15 November 2010
By notice dated 15 November 2010, the respondents made a further offer of compromise. It was expressed to be made under Order 23 of the Federal Court Rules (repealed), which was then in force. The offer was for:
a)the respondents to pay the applicant $5,000 including $400 of interest plus costs as taxed or agreed; and
b)the respondents to provide certain undertakings and deliver up certain items.
The offer made on 15 November 2010 was open for 14 days. The applicant refused the offer.
The offer did not state the cost consequences of the offer being refused. However, the respondents now say that the offer contemplated that, in the event that it was not accepted, the applicant would be liable to pay costs on the Federal Court scale. However, the respondents in fact now seek costs on an indemnity basis from the date of the offer.
The old Order 23 rule 11(6) of the Federal Court Rules (repealed) provided that:
(6)If:
(a) an offer is made by a respondent and not accepted by the applicant; and
(b) the respondent obtains an order or judgment on the claim to which the offer relates as favourable to the respondent, or more favourable to the respondent, than the terms of the offer;
then, unless the Court otherwise orders:
(c) the respondent is entitled to an order that the applicant pay the respondent's costs in respect of the claim incurred up to 11 am on the day after the day the offer was made, taxed on a party and party basis; and
(d) the respondent is entitled to an order that the applicant pay the respondent's costs in respect of the claim incurred after that time, taxed on an indemnity basis.
The effect of that rule was considered in IFTC Broking Services Ltd & Anor v Commissioner of Taxation (2010) 268 ALR 1(2010); 78 ATR 606; [2010] FCAFC 31 where the Full Federal Court said at [9] and [12] to [13]:
9 It may be accepted that the prima facie position established by O 23 r 11(6) can be departed from. So much is clear from the statement of exception in the rule which the appellants seek to invoke (unless the court otherwise orders). The cases say more than this, however. The cases establish that:
(1)If O 23 r 11(6) is engaged it is for the applicant to satisfy the Court that the prima facie position established by that rule should be departed from: Futuretronics at [12].
(2)Unlike a case in which a Calderbank offer (named after the decision in Calderbank v Calderbank[1975] 3 All ER 333) is made, the fact that an unsuccessful litigant acted reasonably in rejecting an offer of compromise "is not of itself a sufficient reason to displace the operation of the rule": Futuretronics at [11].
(3)It is true that doubts have been expressed about a need to show "compelling and exceptional circumstances" to justify otherwise ordering: see Port Kembla Coal Terminal at [17]. Nevertheless, properly understood, the rule creates a presumption in favour of indemnity costs which the unsuccessful party must rebut. A court may depart from the presumptive position but only "for proper reasons which, in general, only arise in an exceptional case": Port Kembla Coal Terminal at [17] cited with approval in Futuretronics at [10].
(4)The requirement for "proper reasons" for any departure from the prima facie position of indemnity costs reflects the purpose of the rule. As explained by Mason P in Morgan v Johnson[1998] NSWSC 367; (1998) 44 NSWLR 578 at 581F-582E (Morgan) the rule is intended to encourage the compromise of litigation (such compromise being in both the private and the public interest) and to oblige parties "to give serious thought to the risk involved in non-acceptance" on the basis that "litigation is inescapably chancy": Maitland Hospital v Fisher [No 2] (1992) 27 NSWLR 721 at 725. For these reasons "the ordinary provision is expected to apply in the ordinary case" (referring to New South Wales Insurance Ministerial Corporation v Reeve (1993) 42 NSWLR 100 at 102-103).
12Futuretronics exposes the difference between a Calderbank offer and an offer of compromise. In respect of a Calderbank offer, characterisation of the refusal to accept the offer as reasonable or not is significant, even potentially determinative. In respect of an offer of compromise, the reasonableness of the refusal to accept the offer is not, of itself, sufficient to displace the consequence of indemnity costs. The appellants’ reliance on various circumstances said to make their refusal of the offer reasonable fails to confront this difference of principle.
13The immediately preceding point also undermines the appellants’ reliance on the circumstances during the time the offer was open for acceptance. Moreover, the rule itself directs attention to the outcome of the litigation, a fact not known at the time of the offer. …
The applicant, however, argued that the new Federal Court Rules 2011 should apply. In the new Federal Court Rules 2011, the equivalent provision is Rule 25.14(2). It provides for indemnity costs in the event that the offer is unreasonably refused.
The applicant noted the transitional provisions in Rule 1.04 of the new Federal Court Rules2011. That rule is as follows:
(1)These Rules apply to a proceeding started in the Court on or after 1 August 2011.
(2)These Rules apply to a step in a proceeding that was started before 1 August 2011, if the step is taken on or after 1 August 2011.
(3)However, the Court may order that the Federal Court Rules as in force immediately before 1 August 2011 apply, with or without modification, to a step mentioned in subrule (2).
The applicant argued that the relevant step in this proceeding is the respondents seeking to enforce the offer of compromise, and not the making of the offer of compromise. Consequently, the applicant argued, the new Federal Court Rules 2011 should apply.
I do not accept that argument. The relevant step is the refusal of the offer of compromise. That occurred before 1 August 2011. Subrule 1.04(3) permits the court to apply the old rules to a step taken after
1 August 2011. Subrule 1.04(3) does not authorise the reverse.
The applicant then argued that this is an exceptional case, such that the presumption established by old Order 23 rule 11(6) should be departed from. The applicant relied on the consideration of the meaning of exceptional circumstances in Nutrientwater Pty Ltd v Baco Pty Ltd (No 2) [2010] FCA 304. In that case, Kenny J said at 28 to 36:
28.In the particular circumstances of this case, it is unnecessary to decide whether or not Baco’s proposal was an offer for the purposes of rule 11(6) or the common law. This is because, having regard to the circumstances to which I am about to refer, Nutrientwater has shown that: (1) the presumption in rule 11(6) should not crystallize; and (2), so far as the common law is concerned, its rejection of the offer was neither imprudent nor unreasonable. Accordingly, I would not award indemnity costs under rule 11(6) or the common law; and Baco’s indemnity costs application must fail.
29.The circumstances to which I would particularly refer are as follows. First, there is the extent of the compromise offered. This was slight. By its fast track application, Nutrientwater applied for various forms of relief, including declarations, injunctions and damages. Baco’s offer of compromise was to pay $3,000 in settlement of all claims “inclusive of costs”. The offer did not address the relief sought for injunctions and declarations, and was for a modest pecuniary amount.
30.Baco sought to justify this offer by reference to the fact that, after it received a letter of demand from Nutrientwater on 16 December 2008 and before the market release of its new products, Baco changed the products’ get-up at some significant cost to it. Given Nutrientwater’s subsequent response in commencing this proceeding, however, these changes were plainly insufficient to satisfy Nutrientwater. Further, whilst the relevance of these prior changes from Baco’s perspective is clear enough, the fact these changes were made at some expense to Baco did not transform Baco’s offer to Nutrientwater into a commercially reasonable one; and nor did it transform it into an offer imprudent to refuse.
31.On no view could the offer be so described. Rather, the offer, even if not accurately described as just a ‘walk away offer’, was not far from such an offer. Save for Baco’s modest payment of $3,000 to Nutrientwater, each party was to walk away from the proceeding bearing its own costs. There are authorities to the effect that a defendant’s offer to settle on the basis that each party bears its own costs is not a Calderbank offer and, in any event, may not be considered a genuine offer of compromise: see Dresna Pty Ltd v Linknarf Management Services Pty Ltd (In liq) (No 2) [2006] FCA 755 at [20]; Australian Competition and Consumer Commission v Universal Music Australia Pty Ltd (No 2) [2002] FCA 192; (2002) 201 ALR 618 at [59]- [60]; McKerlie v State of New South Wales (No 2) [2000] NSWSC 1159; Vasram v AMP Life Limited[2002] FCA 1286 at [12]; and Fyna Foods Australia Pty Ltd v Cobannah Holdings Pty Ltd (No 2) [2004] FCA 1212 at [10]. It is unnecessary to consider whether these authorities directly assist here and whether a similar approach should apply in the context of O 23 r 11(6). It is sufficient to say that the extent of the compromise involved is a relevant consideration in determining whether there should be a departure from the prima facie position in r 11(6); or whether the rejection of the compromise offer was unreasonable or imprudent for common law purposes: compare Fyna Foods at [11] and Vasram at [13].
32.Secondly, the offer of compromise was made before Nutrientwater had sufficient information realistically to assess its prospects of success in light of Baco’s position. This was chiefly because it did not know Baco’s position at the time it received and was to consider the offer. As noted already, Nutrientwater filed its fast track application and statement on 25 June 2009. Nutrientwater received Baco’s offer of compromise on 13 July 2009 and that offer expired 14 days later on 27 July 2009. Baco’s fast track response was said to be served on Nutrienwater’s (sic) solicitors at around 4 pm on 27 July 2009. This was not denied. Baco thus closed the offer before Nutrientwater had an opportunity to consider it in light of Baco’s response. The offer had almost expired by the time this response was received.
33.Thirdly, when Baco’s offer of compromise was made, it was not accompanied by any statement by Baco as to why it maintained that the Nutrientwater application would fail and/or its offer should be accepted. In Dukemaster at [8], in relation to offers of compromise not within O 23 r 11(6), Sundberg and Emmett JJ said:
Whatever the position may be with an offer made under Order 23, a Calderbank offer, or any offer of compromise outside the regime in Order 23, is unlikely to serve its purpose of attracting an indemnity award of costs if the rejecting applicant fails to recover more than what is offered, unless the offer is a reasonable one and contains a statement of the reasons the offeror maintains that the application will fail.
34.Of course, the position is different under rule 11(6), where a not unreasonable rejection of an offer of compromise is not a sufficient reason to displace the presumption to which the rule gives rise; and the failure to provide sufficient information to permit the rejecting party to assess its prospects is not sufficient of itself to displace the presumption. These factors may, however, form part of the total circumstances that satisfy the Court that it is appropriate in the particular case to depart from the prima facie position otherwise established by the rule.
35.Fourthly, the applicants’ case was not such that from the outset it could have been characterized as without prospect of success. The applicants failed and, with the benefit of hindsight, perhaps it might be said that this result might have been anticipated at some point prior to the end of the trial. Precisely when this point of anticipation came into being is not clear. This is partly because there were some imponderables, as Weinberg J referred to like matters in Dresna at [18]. For example, Mr Mark Epstein was a credible witness, and I was generally impressed by his frankness. This assisted Baco’s case, particularly in setting out the circumstances surrounding the packaging and get-up of its Grassroots products. Had I formed a different view, the applicants’ case may have been stronger. Also, by way of example, I note that I ultimately found that the consumer confusion evidence was not probative of the applicants’ claim; and that the evidence of Mr Partridge was not helpful. It may be recalled that he alone testified as to confusion between the applicants’ and the respondent’s products. There are other examples of this kind: it is unnecessary to refer to them all. What they illustrate is that the trial in this case as in some other cases had its own dramatic momentum, which makes ‘hindsight’ an inappropriate standard by which to assess the strength of the applicants’ case prior to the end of the trial. The applicants’ case was responsibly contested and, whilst it might have been seen as problematic (to use Weinberg J’s language again) in some respects, particularly given the presence of vitamin water and the other participants in the enhanced water market prior to May 2009, the cogency of its case was likely diminished in a number of ways that might well not have been anticipated prior to trial.
36.The above-mentioned are the chief factors that lead me to conclude that: (1) the circumstances are relevantly ‘exceptional’, and the Court should depart from the prima facie position for which rule 11(6) provides; (2) if rule 11(6) is inapplicable, the rejection of the offer was neither unreasonable nor imprudent within the meaning of the common law test. These same factors also support the conclusion that an award of indemnity costs would not serve the policy that such an award is intended to serve in circumstances such as these – to encourage a litigant to give careful consideration to its legal position and to engage in a practical way in discussions with a view to settlement.
The applicant argued that the relevant exceptional circumstance in this case was that the respondents had not discovered all relevant documents at the time the offer was made. Additionally, the respondents had not provided their affidavits of evidence. Particularly, the respondents had not provided their order form for the fabric, which was dated 10 November 2009, or the invoices from their supplier surrounding the invoice in question in this proceeding. These documents were undoubtedly significant in the final determination of the case. I also note that the offer included a quite small sum of money, which was considerably less than the applicant’s could have expected to have recovered if they had been successful in the proceeding.
The respondents, on the other hand, say that, by 15 November 2010, the applicant had the benefit of the respondents’ discovery, and a clear explanation that exculpated the respondents. However, the respondents did not file their evidence on affidavit until February 2011.
The respondents also say that the applicant’s conduct generally warrants an order for indemnity costs. However, the particular matters complained of, apart from the one previously mentioned, postdate the offer of 15 November 2010.
In my view, the circumstance that significant documents had not been provided, and the offer being so small, put the refusal of the offer of 15 November 2010 into the exceptional category. I consider that the circumstances of this case displace the presumption of indemnity costs.
c. the offer dated 16 December 2010
By letter dated 16 December 2010, the respondents offered to settle the proceedings on the basis that:
a)the respondents pay the applicant $50,000;
b)the respondents consent to various injunctions and to orders for the delivery up of certain items; and
c)there be no order as to costs.
The letter stated that, in the event the offer was refused, the respondents would produce the letter in support of a claim for indemnity costs.
The question is whether the refusal was unreasonable or imprudent, such as to bring it within one of the categories which often warrant an indemnity costs order, as explained in Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225; (1993) 118 ALR 248; [1993] FCA 536. As set out in Hazeldene’s, in assessing these matters, it is necessary to consider:
(a) the stage of the proceeding at which the offer was received;
(b) the time allowed to 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;
(f)whether the offer foreshadowed an application for an indemnity costs in the event of the offeree’s rejecting it.
At the time of the refusal of the offer of 16 December 2010, the respondents had provided discovery, but not of all the documents that proved to be highly relevant, and they had not provided their affidavits of evidence. The offer was expressed to be open for seven days. That is a short period of time, given the size of the litigation.
Regarding the extent of the compromise offered, it was not necessary to decide in the substantive reasons for judgment how much the applicant would have been awarded for damages if it had been successful. However, in the letter dated 22 December 2010 refusing the offer, the applicant made a counteroffer, seeking $40,000 for damages and $70,000 for costs. Asking the respondents to pay $70,000 for costs at that stage of the proceeding was excessive. The respondents’ offer of $50,000 all in approached the amount that the applicant could realistically have expected to be awarded if it had succeeded, leaving aside subsequently incurred costs. Consequently, the extent of the compromise offered was not great.
I do not consider that, at the time of the refusal, the applicant’s prospects of success were particularly good. It was necessary for the applicant to prove its case, unless it had sufficient evidence to persuade the court that the burden of proof shifted to the respondents. The applicant should have known that its own evidence was insufficient to prove its case, and that it could only win if the respondents’ evidence did not substantiate their case as explained by letter. Having said that, the respondents had not filed their affidavits of evidence as at
16 December 2010.
The terms of the offer were quite clear. The offer foreshadowed a claim for indemnity costs.
All in all, I do not consider that the refusal of the offer made on
16 December 2010 warrants an order for indemnity costs. The respondents had still not provided their affidavits of evidence. At that point, the applicant did not know whether the respondents would actually be able to provide sworn or affirmed evidence substantiating their claims. Consequently, it was not possible for the applicant to assess the cogency of the respondents’ case. The various complaints about the applicant’s conduct of the proceeding, apart from those mentioned previously, had not yet occurred. Although the amount offered approached the amount that the respondents might have been ordered to pay if they had lost, including costs, the refusal does not strike me as being so unreasonable or imprudent that an order for indemnity costs is warranted.
d. the offer dated 23 December 2010
The respondents made a further offer by letter dated 23 December 2010. It said that the applicant’s butterfly drawing was copied from another designer’s work and, consequently, copyright did not subsist in the applicant’s work. The offer proposed that the proceedings be dismissed and that the applicant pay the respondents’ costs in a certain amount.
The premise underlying this offer was ultimately determined to be unfounded. I do not consider that it was unreasonable for the applicant to reject this offer.
e. the second respondent’s offers
The second respondent by letters dated 28 May 2010 and 12 November 2010 offered to compromise the proceeding on the basis that the proceedings be discontinued against him with no order as to costs. The basis for the offer was apparently that, in the second respondent’s view, he could not be found to have authorised any copying by the first respondent. This issue was the subject of a strike out application.
It was determined that, if it were found that the first respondent had copied the applicant’s work, it would be reasonably arguable that the second respondent had authorised that copying, even if the only fact supporting authorisation was that the second respondent was the sole director of the first respondent. In the circumstances, I do not consider that the applicant’s rejection of that offer was unreasonable.
f. the applicant’s conduct of the case
The respondents claimed that, in addition to the refusal of offers of settlement, the applicant’s conduct of the case warranted an order for indemnity costs. The particular matters relied on by the respondents were as follows:
a)the maintenance of largely unparticularised claims against the respondents despite the absence of any direct evidence of copying and despite the applicant’s concession that leakage of customer’s designs occurs in China;
b)the use of the court’s coercive powers to force the respondents to identify the full name and contact details of an ex-employee of the first respondent, and subpoenaing her as a witness, even though she had ceased her employment with the first respondent before the events in question;
c)pressing for the admission of irrelevant evidence concerning unproven allegations of past copying, where that copying was permissible at law in any event;
d)exhibiting to an affidavit documents written in Chinese which the deponent of the affidavit could not read or understand;
e)exhibiting to an affidavit documents written in Chinese without providing translations, contrary to the court’s translator policy, and with the result that the respondents were required to source and pay for their own translations, which led to significant corrections to the applicant’s evidence;
f)requiring a witness for the respondents, who lives and works in China, to appear in court in person, rather than by video, but asking the court to dispense with personal attendance for some of its own witnesses;
g)requiring over 60 authorities to be included in the joint folder of authorities, when only a handful were referred to in submissions;
h)engaging in unnecessarily lengthy cross-examination, which unnecessarily prolonged the hearing;
i)opposing the respondents’ request for access to the tapes of the proceeding so that the accuracy of an aspect of the interpretation of a witness’s evidence could be checked; and
j)making extremely serious allegations, akin to fraud, on the flimsiest of bases.
The respondents acknowledged that none of these matters on their own may have warranted an order for indemnity costs. However, the respondents argued that, collectively, these matters demonstrated an attitude to the litigation that had the direct and foreseeable consequence of substantially and unnecessarily increasing the costs of the litigation.
The applicants did not specifically address the question of indemnity costs by reason of its conduct of the case generally.
In the well-known passage from Colgate-Palmolive, Sheppard J noted that the categories of case in which it may be appropriate to order indemnity costs are not closed. His Honour then went on to say, at subparagraphs 5 and 6 of paragraph 24:
5.Notwithstanding the fact that that is so, it is useful to note some of the circumstances which have been thought to warrant the exercise of the discretion. I instance the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud (both referred to by Woodward J in Fountain and also by Gummow J in Thors v. Weekes (1989) 92 ALR 131 at 152; evidence of particular misconduct that causes loss of time to the Court and to other parties (French J in Tetijo); the fact that the proceedings were commenced or continued for some ulterior motive (Davies J in Ragata) or in wilful disregard of known facts or clearly established law (Woodward J in Fountain and French J in J-Corp); the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions (Davies J in Ragata); an imprudent refusal of an offer to compromise (eg Messiter v. Hutchinson (1987) 10 NSWLR 525, Maitland Hospital v. Fisher (No. 2) (1992) 27 NSWLR 721 at 724 (Court of Appeal), Crisp v. Keng (Supreme Court of New South Wales, 27 September 1993, unreported, Court of Appeal) and an award of costs on an indemnity basis against a contemnor (eg Megarry V-C in EMI Records). Other categories of cases are to be found in the reports. Yet others to arise in the future will have different features about them which may justify an order for costs on the indemnity basis. The question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for payment of costs other than on a party and party basis.
6.It remains to say that the existence of particular facts and circumstances capable of warranting the making of an order for payment of costs, for instance, on the indemnity basis, does not mean that judges are necessarily obliged to exercise their discretion to make such an order. The costs are always in the discretion of the trial judge. Provided that discretion is exercised having regard to the applicable principles and the particular circumstances of the instant case its exercise will not be found to have miscarried unless it appears that the order which has been made involves a manifest error or injustice.
It seems to me that this applicant’s conduct of this case approaches but does not quite reach a level that warrants an order for indemnity costs. I note that many of the respondents’ complaints seem to concern the conduct of the applicant’s legal representatives, rather than the applicant itself. (It is possible that the applicant of its own volition instructed its legal practitioners to be unduly difficult and obstructive. However, without more, I am disinclined to accept that.)
g. whether costs should be paid on the Federal Court scale
The respondents sought orders that their costs be paid on the Federal Court Scale, rather than on the scale of this court. The respondents said that was appropriate because:
a)the applicant, although it filed in this court, foreshadowed in its letter dated 2 December 2010, if it had won, a costs application on the Federal Court scale;
b)the case was complex;
c)the amount of damages sought by the applicant in its further amended statement of claim exceeded $150,000 (although rule 40.08 of the Federal Court Rules contemplates a reduction in the costs that may be awarded to a successful party if an applicant has been awarded less than $100,000);
d)the procedures invoked by the applicant were the equivalent of the procedures that are adopted in the Federal Court; and
e)this court has awarded costs on the Federal Court scale in other copyright cases.
Generally, the costs of a matter heard in this court would be awarded on the scale of this court, even if the matter is somewhat complex. However, I consider that it is appropriate in all the circumstances of this case to order the applicant to pay the respondents’ costs on the Federal Court scale. The applicant itself indicated an intention to claim costs on that basis, if it had been successful. Moreover, while the applicant’s conduct of the case does not reach a level that warrants indemnity costs, it does, in my view, warrant a higher than usual order for costs. There will be an order accordingly.
I certify that the preceding sixty-two (62) paragraphs are a true copy of the reasons for judgment of Riley FM
Date: 21 October 2011
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