Lamesa Holdings BV v Commissioner of Taxation
[1997] FCA 375
•12 MAY 1997
CATCHWORDS
COSTS - indemnity or party and party - s 43 of the Federal Court Act – whether there is or should be a ‘usual rule’ in respect of costs - issue maintained until immediately prior to hearing and then abandoned - abandonment of issue as basis for indemnity costs - consideration of motivation for abandonment - prosecution of issues without merit
Federal Court of Australia Act 1976 (Cth) s 43
Federal Court Rules Order 62 Rule 4
Colgate-Palmolive Co v Cussons Pty Ltd [1993] 46 FCR 225
Re Sanchez Ex parte Smits [1994] 49 FCR 326
Henderson & Ors v Amadio & Ors (Heerey J, unreported, Federal Court of Victoria, 22 March 1996)
Marks v GIO [1996] 137 ALR 579
Cachia v Hanes [1991] 23 NSWLR 304
Seavision Investment SA v Everett [1992] 2 Lloyds Rep 260
LAMESA HOLDINGS BV -v- COMMISSIONER OF TAXATION
No. NG648 of 1996
EINFELD J
SYDNEY
12 MAY 1997
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No. NG648 of 1996
GENERAL DIVISION )
Between:LAMESA HOLDINGS BV
Applicant
And:COMMISSIONER OF TAXATION
Respondent
MINUTE OF ORDERS
The Court orders that:
The costs of the applicant applicable or pertaining to the Article 7 issue be paid by the respondent on a party and party basis.
Note: Settlement and entry of orders are dealt with in accordance with Order 36 of the Federal Court Rules.
EINFELD J
SYDNEY
12 MAY 1997
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No. NG648 of 1996
GENERAL DIVISION )
Between:LAMESA HOLDINGS BV
Applicant
And: COMMISSIONER OF TAXATION
Respondent
EINFELD J SYDNEY 12 MAY 1997
REASONS FOR JUDGMENT
Introduction
Judgment in this matter was delivered on 4 March 1997. There remains to be resolved only the question of costs with respect to an aspect of the respondent’s case which was pleaded but abandoned immediately prior to the hearing. The applicant is seeking an order that its costs of and pertaining to this issue be paid by the respondent on an indemnity or solicitor and client basis. The respondent opposes such an order.
Background
The applicant, Lamesa Holdings BV (Lamesa), is a company incorporated in the Netherlands. It appealed against two amended assessments issued by the Commissioner of Taxation (the respondent) for the years of income ended June 30 1994 and June 30 1996 respectively. These amended assessments purported to include in Lamesa’s assessable income profits from the sale of shares in an Australian company. It submitted that the profits from the sale of the shares were excluded from Australian tax by virtue of section 4 of the International Tax Agreements Act 1953 and the 1976 Netherlands-Australia Double Taxation Agreement (Netherlands DTA).
Article 7 of the Netherlands DTA provides that the profits of a Netherlands enterprise are taxable only in the Netherlands unless the enterprise carries on business in Australia through a permanent establishment situated here. Article 13 of the Netherlands DTA provides an exception to Article 7 where the income is derived from an alienation of real property.
There were two substantive issues which arose from these Articles. The first was whether Lamesa had a permanent establishment in Australia (the Article 7 issue). The second was whether the Article 13 exception applied in respect of the sale of shares (the Article 13 issue).
The Article 7 issue was not pursued by the respondent at the hearing and the Article 13 issue was therefore the only substantive matter argued. As the judgment in the matter showed, to give effect to the resolution of the Article 13 issue in favour of Lamesa, I ordered that its objections to the amended assessments be allowed in full and declared that no tax was payable in respect of the two income years in question. I ordered that the respondent pay Lamesa’s costs in respect of the Article 13 issue on a party/party basis and that any submissions on Lamesa’s claim for indemnity costs of the Article 7 issue should be made in writing within 28 days of the judgment being delivered. Those submissions have now been provided.
The law
The Court’s jurisdiction to award costs arises from section 43 of the Federal Court of Australia Act 1976 (Cth), and the details are provided for in Order 62 of the Federal Court Rules. Section 43 provides:
(1) Subject to subsection (1A), the Court or a Judge has jurisdiction to award costs in all proceedings before the Court (including proceedings dismissed for want of jurisdiction) other than proceedings in respect of which any other Act provides that costs shall not be awarded.
Order 62 rule 4(2) states:
(2) Where the Court orders that costs be paid to any person, the Court may further order that as to the whole or any part of the costs specified in the order, instead of taxed costs, that person shall be entitled to -
....
(d) a sum in respect of costs to be ascertained in such manner as the Court may direct.
Thus section 43 in combination with the rules confers on the Court a wide discretion to order costs. There is no doubt that an order to pay costs on an indemnity basis is within the ambit of this discretion. In Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225, Justice Sheppard made a comprehensive examination of the authorities relating to indemnity costs. At 230 his Honour stated:
Notwithstanding the more specific provisions of some rules of Court, I do not consider that the power of this court to order costs to be taxed on one or other of the bases for taxation other than the party and party basis to be circumscribed in any way. As earlier said, I consider that the provisions of section 43 and the other provisions of the Act referred to confer on the Court a wide power to select an appropriate basis of taxation upon costs which it orders to be taxed.
This wide discretion cannot be reconciled with any artificial concept of ‘a usual rule’ where the ‘starting point’ in any analysis of costs is that the successful litigant will receive their costs on a party/party basis. In Marks v GIO 137 ALR 579 at 586, it was said:
The question as to whether indemnity costs will be awarded must always be determined by analysis of the particular facts and circumstances of the case in question. I do not think that there is or should be a type of ‘starting point’ of party and party costs.
In Re Sanchez Ex parte Smits 49 FCR 326 at 326, the basis for dispensing with any notion of a ‘usual rule’ was further articulated:
The ‘usual rule’ that the successful party will receive an order for costs arose when no such legislative intention had appeared. It seems to me that this rule has been replaced by a statutory regime which leaves the matter in the unfettered discretion of each court to be exercised judicially in light of all the circumstances of the particular case. On the other hand, I agree that if there is nothing remarkable about the case, successful parties should expect to have their costs paid, at least on a party/party basis, by unsuccessful parties.
It is now well recognised that the award of costs on a party and party basis does not provide anything like a complete indemnity for the costs incurred in litigation: Marks; Cachia v Hanes [1991] 23 NSWLR 304; Henderson & Ors v Amadio & Ors (Heerey J, unreported, 22 March 1996); Seavision Investment SA v Everett [1992] 2 Lloyds Rep 260. An award of indemnity costs can therefore be viewed as akin to a penalty to be imposed for one or more particularly good reasons. Justice Sheppard in Colgate at 233 outlined some of the bases for the award of indemnity costs:
...the fact that proceedings were commenced or continued for some ulterior motive...or in wilful disregard of known facts or clearly established law...; the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions...; an imprudent refusal of an offer to compromise...
As I see the position, it is necessary also to have regard to the possible effect that an award of costs on an indemnity basis might have. In a case where the abandonment of a whole issue had the effect of narrowing or streamlining the case, and shortening the hearing, it seems to me that the imposition of a special penalty would be harsh indeed. Likewise, where a litigant decides that a point has been raised which for one reason or another cannot or should not be pressed, the effect of this penalty would be to encourage the prosecution of issues that are without merit or unlikely to succeed. The alternative of pressing on with an unworthy argument would be a waste of valuable and scarce Court resources, a far more heinous transgression then abandoning the point at or just prior to the hearing.
Of course this view must be balanced against the need to avoid parties, out of spite or even negligence, subjecting their opponents to needless preparation of issues that are not ultimately pursued. If facts are available to the Court which establish some motive or gross carelessness in a litigant, other than bona fide preparation of a case, for pursuing a subsequently abandoned issue up to hearing or a late stage prior to the hearing, at significant cost to the other side, it is in my opinion well within the Court’s discretion to make an award of costs on an indemnity basis. In my view, such an ulterior motive or lack of care would have to be proved with a reasonable degree of certainty in order to avoid the situation where parties were induced to litigate points which should properly be abandoned for fear that they might otherwise incur a costs penalty.
To resolve this matter in the present case, it is necessary to analyse the events prior to the abandonment of the Article 7 issue in this case to decide if it warrants the exercising of the Court’s discretion to award costs on an indemnity basis.
The history of the Article 7 issue
The respondent originally issued its notices of assessment to Lamesa in respect of the profits from the sale of the relevant shares on 17 January 1996. The hearing of this matter began on 16 December 1996. There is no question that, throughout this period, the respondent maintained, as one of the grounds on which Lamesa was liable to pay tax, that it had a permanent establishment in Australia. Similarly, there is no doubt that Lamesa necessarily incurred significant costs in preparing to meet this issue at the hearing and that, upon the issue being abandoned, its preparation on the point was rendered obsolete.
In putting forward its argument for the award of indemnity costs, Lamesa simply outlined the circumstances surrounding the progress of this issue and declared that they justified the exercise of the Court’s discretion. There was no express contention that the circumstances pointed to some ulterior motive or that any of the other circumstances referred to in the cases justified the award here. In other words, the circumstances were left to speak for themselves with no yardstick being suggested for measuring the gravity of the transgression as should lead to an award of indemnity costs.
The particular circumstances
Lamesa submitted that the following actions of the respondent amount to circumstances which justified the exercise of the Court’s discretion:
· the maintenance of an issue which was unsustainable up to the point of trial
· insistence on the applicant discharging its statutory burden of strict proof
· reluctance to commit to a position on permanent establishment until ordered to do so by the Court
· forcing the applicant to incur significant legal costs in the preparation of substantial evidence, including from three overseas witnesses
· reluctance to commit to a position on whether the evidence was disputed or whether the witnesses were required to attend for cross-examination
· abandoning the issue on the eve of the hearing
It seems to be implied that, because it was ultimately abandoned, the Article 7 issue never had any merit and was known by the respondent to be unsustainable throughout the period leading up to the hearing. Moreover, these assertions make a number of unproved allegations of fact which ignore the position that as the Article 7 issue was not pressed, neither they nor the merits of the issue have been subjected to the scrutiny of a hearing.
The respondent pointed to two principal factors that it said mitigated its initial pursuit and subsequent abandonment of the issue. Firstly, with respect to the allegation that the case was not particularised until the respondent was ordered to do so by Justice Hill on 11 September 1996, it was pointed out that the respondent’s solicitor had then indicated his client’s intention and purpose in pursuing the Article 7 case:
Your Honour, it is not a question of refining the case. It is a matter of specifying the matters that are requested and doing that in a way where we cover adequately, so that it is not alleged against us that we did not raise a point or argue a point. So we want to be careful in the weay (sic) in which we put our case.
This keenness to maintain all available options must be viewed in light of the fact that the respondent had already acceded to Lamesa’s request for the hearing of the matter to be expedited so that it took place only four months after the filing of the appeal against the decisions on the objections. The respondent said that he was therefore not afforded the usual luxury of an extended period in which to prepare his case. He therefore decided, as he said was required of him by his statutory responsibilities, to maintain all possible causes of action until they were fully explored. It seems that the respondent was conscious of the words of Justice Heerey in Henderson & Ors v Amadio & Ors (unreported, 22 March 1996):
It can be said that both the law itself and the culture of adversarial litigation encourages, indeed almost compels, the raising of every possible issue which might achieve success. A litigant cannot keep a point in reserve to raise at a later time: Port of Melbourne Authority v Anshun Pty Ltd [1981] 147 CLR 589.
For this concept was exactly the situation that occurred in this case. The respondent was pursuing an issue in order to cover all the options available.
The second factor raised by the respondent was that the expenses incurred by Lamesa (including travelling to the United States to interview witnesses) indicated that it considered the issue required serious consideration and raised genuinely contentious matters.
Conclusion
On the facts available, this inference is at least as valid as those submitted by Lamesa. There is no evidence that the respondent was acting other than in the bona fide performance of his responsibility to protect the revenue of the Commonwealth. Yet, in order to justify an order for indemnity costs, the Court would have to be satisfied that the conduct of the respondent in abandoning the case, and his motivation for pursuing it for as long he did, were not merely forensic but were in some way reprehensible or without reasonable justification. Apart from the situation that such a serious finding could not be made without a full factual inquiry into the conduct of the matter, everything available in this case suggests the contrary.
Considering that none of the criteria referred to by Justice Sheppard existed, and that there was no analogous situation, an order for indemnity costs is, in my opinion, not appropriate in this instance. I believe that, in this case, the Court should adopt an approach to costs which would have been adopted had the Article 7 issue been fully pursued by the respondent and lost. On the material available to the Court, the result would have been to award costs to the successful applicant on a party/party basis. That is what I propose to order here.
For the applicant:
Mr I.V Gzell QC and Mr R.L. Hamilton instructed by Freehill Hollingdale & Page Solicitors For the respondent: D.H. Bloom QC, G.T. Pagone QC and A.J. Payne instructed by Australian Government Solicitor Dates of Hearing: 16 and 17 December 1996 Written submissions
completed:9 April 1996 Date of judgment: 12 May 1997
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