ACCC v Boral Limited

Indemnity costs 2 Senior Counsel for the respondents argued that there were special and unusual features in the present case that warranted a departure from the ordinary rule in favour of party and party costs. It was said the Commission acted unreasonably in instituting and maintaining this proceeding against the respondents. It should have known that the case was bound to fail and it acted imprudently and unreasonably in refusing offers of settlement. 3 To appreciate the way the respondents put this argument it is necessary to go in a little detail into events both before and after the commencement of the proceeding. 4 On 22 December 1995 the Commission wrote to Boral advising of a complaint by C & M to the effect that Boral had substantially dropped its price for masonry bricks and blocks immediately prior to C & M commencing operation of its new Campbellfield plant. Some correspondence took place between the parties and then on 25 November 1996 the Commission served a s 155 notice on BBM. The notice alleged that BBM and its related companies had contravened s 46 by engaging in "selective predatory pricing" of concrete masonry products. This was said to have been as a result of co-ordination of BBM's activities with Pioneer. Further it was said that BBM and Pioneer, as a result of their "co-ordinated interaction", had a substantial degree of power in the market. 5 While the respondents complied with the s 155 notice, correspondence also ensued in 1997 in which the respondents' solicitors Blake Dawson Waldron (BDW) asserted that it was "manifestly clear" that their clients did not have the market power alleged. In June 1997 BDW provided the Commission with a detailed formal submission asserting that BBM did not have a substantial degree of market power in any relevant market and that its conduct in each relevant market was solely its lawful competitive response to prevailing and anticipated market conditions. In October 1997 a meeting took place between the respondents' officers and solicitors and the Commission's officers and its Senior Counsel. Amongst other things the Commission confirmed that it was not pursuing further the exploration of co-ordinated interaction or express contract, arrangement or understanding between Boral and Pioneer. 6 In December 1997 BDW made a further detailed submission asserting that its clients did not have a substantial degree of power in a market of which they might take advantage. The submission adverted to what were said to be fundamental matters of fact that were fatal to the allegations of the Commission. These included: · vigorous competition between BBM, Pioneer, Rocla, C&M and Budget resulting in very low pricing levels; · no opportunity for recoupment of losses sustained in the course of low pricing behaviour ; · BBM market share not exceeding 30 per cent; and · the substitutability of other products for concrete masonry products. 7 As it turned out, all these matters featured in the judgment. 8 On 19 January 1998 the Commission wrote to BDW indicating it would be considering the case at its meeting in the first week of February and suggesting a meeting between its representatives on 16 February to discuss the Commission's decision. On 27 January BDW wrote to the Commission stating: "Our client remains of the view that the Commission has no good reason to make a decision to prosecute in this matter. This is in light of all the circumstances prevailing in the industry during the relevant period, many of which have been discussed with you. We also confirm that, in our client's view, the arguments put forward on behalf of the Commission at the recent meetings with us rely unduly on theoretical considerations which do not fit the facts or the practical characteristics of our client's business and the industry in which it operates." 9 On 11 February the Commission cancelled the 16 February meeting and stated that it was not prepared to meet and discuss the matter further. 10 The present proceeding was issued by the Commission on 5 March 1998. At the first directions hearing on 27 March Senior Counsel for the Commission stated that the case was "one of the first seriously pleaded predatory pricing cases mounted in the Court by the Commission and indeed possibly the first since the Parkwood Eggs case some twenty years ago". 11 On 21 April 1998 BDW wrote to the Australian Government Solicitor (AGS) referring to the submissions in June and December 1997 and asserting that the respondents remained firmly of the view that the Commission's proceedings were misconceived. The letter continued: "Accordingly, our clients propose to defend these proceedings vigorously. In doing so of course our client may incur very significant costs and prejudice, in terms of legal fees, fees for other consultants, management time and dislocation and negative publicity. In the event that either or both of our clients successfully defends these proceedings our clients will naturally seek an award of costs from the Court. Such costs will be sought on a full indemnity basis as the Commission has apparently elected to commence proceedings in disregard of the detailed factual and other material put forward in our clients' submissions." 12 The letter concluded with an offer that if the Commission withdrew prior to the close of pleadings or at any time prior to 2 May 1998 the respondents would not seek an order for costs. On 1 May 1998 the AGS replied rejecting that proposal and asserting that the evidence available to the Commission suggested that the respondents' assertions were not well founded. BDW replied on 22 May pointing out that the Commission had not directly taken issue with the detailed matters set out in the respondents' submissions. The intention to seek indemnity costs was restated. AGS did not respond to this letter. 13 By the end of May 1999 both sides had completed the filing of lay evidence. On 30 May BDW wrote to AGS stating that the evidence demonstrated that BBM did not have market power in any relevant market. The letter again gave notice of a claim for costs on an indemnity basis. BDW repeated its request for the Commission to discontinue the proceedings. Implicit in the letter was the proposition that if this occurred the ordinary consequence would follow, namely the respondents' costs to date would be payable by the Commission on a party and party basis. 14 On 17 June AGS wrote to BDW rejecting its submissions and asserting that the arguments raised relating to the market power issue were "completely overshadowed by the irresistible inference to be drawn from the combination of" two matters. These matters were (i) pricing below avoidable cost for an extensive period whilst increasing output and capacity to produce and (ii) "numerous contemporaneous statements of [BBM's] predatory purpose". 15 In the course of the present argument Senior Counsel for the respondents referred to numerous excerpts from witness statements filed by the Commission to the effect that products other than concrete masonry, notably tilt-up panels and clay bricks, were used as alternatives to concrete masonry products. Those witnesses included Mr Ullner, Mr Newsome, Mr Byrne, Mr Whiteford, Mr Goulding, Mr Steele, Mr Griffin, Mr Pethica and particularly Mr Coghill of Budget. Senior Counsel drew attention to my observation in the judgment that the evidence as to product substitutability was "all the one way" (par 122). Senior Counsel for the Commission did not contest these submissions. 16 Senior Counsel for the respondents pointed out that, even if the market were to be defined as contended for by the Commission, there was no reasonable basis for asserting that BBM had a substantial degree of power in such a market. The unchallenged evidence was that barriers to entry were low and that there was a high degree of competition demonstrated by the history of competition for major projects. Nor was there any prospect of BBM being able to recoup its loss by charging supra-competitive prices; this necessarily followed from fundamental facts such as the existence of Pioneer as a strong competitor and the low barriers to entry. 17 A recent authoritative re-statement of the applicable principles is to be found in the joint judgment of Cooper and Merkel JJ in Re Wilcox; ex parte Venture Industries Pty Ltd (1996) 141 ALR 727 at 732-33: " (1) Section 43 of the [Federal Court of Australia Act 1976 (Cth)] confers an absolute and unfettered discretion on the court to make orders as to costs but the discretion must be exercised judicially. (2) In order to exercise the discretion judicially the following principles have been accepted by the court as applicable: (a) the court ought not to depart from the rule that costs be ordered on a party and party basis unless the circumstances of the case warrant the court in departing from the usual course; (b) the circumstances which may warrant departure from the usual course arise as and when the justice of the case so requires or where there may be some special or unusual feature in the case to justify the court in departing from the usual course; (c) while the circumstances in cases in which indemnity costs have been ordered offer a guide, the question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for costs other than on a party and party basis." 18 These principles were recently applied by another Full Court in Abbott v Random House Australia Pty Ltd [1999] FCA 1540 at 4. 19 The Full Court in Wilcox re-affirmed the correctness of the well-known review of the law on this subject by Sheppard J in Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225. Amongst other things, Sheppard J noted (at 233) some of the circumstances which had in the past warranted the exercise of the discretion to award indemnity costs, including the fact that the proceedings were commenced or continued "in wilful disregard of known facts or clearly established law" or by making "allegations which ought never to have been made" or by "imprudent refusal of an offer to compromise". Also his Honour pointed out (at 231) that the discretion "is not so circumscribed that an order of this character may be made only against an ethically or morally delinquent party". A successful party putting the other side on notice that it regards the action as misconceived and giving detailed reasons for so thinking has also been held to provide good reasons for an award of indemnity costs: Davids Holdings Pty Ltd v Coles Myer Limited (1959) ATPR 41-383 at 40,303. 20 Notwithstanding the force of the arguments advanced by Senior Counsel for the respondents, I think on balance this is not an appropriate case for an award of indemnity costs. 21 A striking feature of this case is that from start to finish the parties were at odds at a basic conceptual and theoretical level. In very broad terms, the Commission's case was that pricing below avoidable cost for a sustained period, and increasing capacity, was only consistent with the respondents' possession of a substantial degree of market power. That conclusion, coupled with the direct evidence of proscribed purpose, made out a contravention of s 46. Coupled with this approach was an argument that inefficient allocation of resources in itself bespoke abuse of market power. As Senior Counsel for the Commission said in opening (T51): "At the end of the day, if Boral was permitted to reduce its price below its avoidable cost to [sic, presumably "of"] production where the price reduction was not matched by increases in efficiency, the effect would be to deny to the community the benefit of the new, more efficient entrant. Such a denial must result in a failure to achieve productive efficiency, it must result in a failure to maximise allocative efficiency and such result can follow only because of the use of power. This must hold true regardless of whether it was Boral, Pioneer or C&M who started the price war. The question is not who dropped the hankie, the question is where everybody ran in the race. Thus, even if it was Pioneer who first initiated discounts, such a step does not entitle Boral or BBM to institute a long-term policy if [sic, presumably "of"] pricing below its avoidable or variable costs to [of] production in an attempt to cause a number of participants in the market to exit so that Boral and BBM can achieve a higher post exit level of profitability and that, your Honour, was precisely their purpose, their stated purpose." 22 The respondents' response, which I accepted, and which was supported by the evidence of Professor Hay, treated pricing below avoidable cost as not necessarily predatory or, in s 46 terms, a taking advantage of market power: see judgment pars 175-185. In particular, I accepted the respondents' more conventional, linear, issue by issue approach and their emphasis on the uncontested evidence as to product substitutability in concluding that the relevant market was one in which the respondents could not possibly have a substantial degree of power: see TPA s 4E. 23 In formulating and presenting its case however, the Commission relied on the evidence of Professor Robert Officer, one of Australia's leading market economists, and the advice of experienced senior and junior counsel. It is also fair to say that s 46 in its application to alleged predatory pricing is somewhat uncharted territory in Australia. And such cases are inherently problematic because a prospective defendant is engaging in the very sort of conduct Pt IV is intended to promote, namely competition which may, quite lawfully, be deliberate and ruthless: Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Pty Ltd (1989) 167 CLR 177 at 191. 24 In commencing and continuing this proceeding on the basis of well qualified economic and legal advice I do not think the Commission can be said to have been acting unreasonably, still less improperly. And this is so even if such advice was unorthodox (and I am not saying it necessarily was) or theory-driven. In the last decade in Australia there have been decisions in some areas of the law at the highest level which might be said to have been contrary to the weight of previously held professional expectation. Nevertheless, the litigants launching such cases could not be said to have been acting unreasonably or improperly.

Apportionment 25 Senior Counsel for the Commission contended that an appointment should be made because the respondents were unsuccessful on two central issues, namely; (i) Whether BBM's costs should be discounted by "upstream profit adjustment"; and (ii) Proscribed purposes under s 46(1). Again the principles are not in dispute. They were stated by Toohey J when a Judge of this Court in Hughes v Western Australian Cricket Association (1986) ATPR 48,134 at 48,136: (i) Ordinarily costs follow the event and a successful litigant receives his costs in the absence of special circumstances justifying some other order. (ii) Where a litigant has succeeded only upon a portion of his claim the circumstances may make it reasonable that he bear the expense of litigating that portion upon which he has failed. (iii) A successful party who has failed on certain issues may not only be deprived of the costs of those issues but may be ordered as well to pay the other party's costs of them. In this sense, 'issue' does not mean a precise issue in the technical pleading sense, but any disputed question of fact or law." See also Inn Leisure Industries Pty Ltd v D F McCloy Pty Ltd (No.2) (1991) 28 FCR 172. 26 On behalf of the Commission there was affidavit evidence from which it might be concluded that the time spent both in the interlocutory proceedings, and in particular discovery, as well as cross-examination at the trial might result in a total deduction of thirty per cent to take account of those two issues. 27 As to the costing issue, it is true that the allegation of pricing below avoidable cost was a central issue at the trial. It is also true that had I accepted the respondents' case on upstream profit adjustment my finding as to pricing below avoidable cost would have been substantially different, if not a complete rejection of the Commission's case. Nevertheless in advancing this contention the respondents were relying on the expert opinion of Professor Hay that such costing was fair and appropriate for the purposes of s 46. If the Commission were acting reasonably in relying on Professor Officer, by the same token I think the respondents were acting reasonably in relying on Professor Hay. 28 As to the issue of proscribed purpose, I think that, all other things being equal, a court should perhaps be less ready to make an apportionment of costs in the case of a successful defendant who has unsuccessfully contested some issues as compared with a successful plaintiff who has raised some issues on which it failed. In the latter case, the plaintiff chose to raise the issues that failed. In the former the defendant has little choice but to do the best it can on issues that it did not choose to raise. 29 This is not a case where a successful defendant advanced a positive case ultimately found to be false. Rather it produced documents on discovery, and then had to argue as best it could on the inferences to be drawn from those documents. 30 More importantly, however, I think the nature of these proceedings would make it unreasonable to make the apportionment suggested. Whether or not a proceeding under Pt IV is properly characterised as quasi-criminal, the fact remains that such cases are at a level of seriousness beyond ordinary civil contractual and tortious disputes (and the quasi-tort of s 52). The greatly increased penalties imposed by Parliament reflect a view that contravention of Pt IV can go beyond the immediate parties and seriously affect the economic well-being of the nation. Today a finding of substantial contravention of Pt IV would rightly be seen as carrying a stigma, especially for a major corporate group. That being so, I do not think the respondents can be criticised for contesting the case at every point. Put another way, it is somewhat unrealistic to expect companies in the position of the respondents to make formal admissions that they intended to eliminate or substantially damage competitors, or to deter or prevent persons from engaging in competitive conduct, especially when they have provided detailed submissions to the Commission as to why the matter should not proceed at all, the grounds for such submissions having been eventually vindicated in the Court's judgment.

Conclusion 31 I therefore do not accept either the respondents' application for indemnity costs or the Commission's application for apportionment. There will be an order that the Commission pay the applicant's costs of the whole application including reserved costs, save that the costs of and incidental to the hearing on 15 November 1999 shall be reduced by one half. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey.

Counsel for the Applicant: Mr D Shavin QC and Mr M Crennan

Solicitor for the Applicant: Australian Government Solicitor

Counsel for the Respondents: Mr A C Archibald QC and Mr C M Maxwell QC

Solicitor for the Respondents: Blake Dawson Waldron