Australian Consumer & Competition Commission v Contact Plus Group Pty Ltd

REASONS FOR JUDGMENT 1 On 8 February 2006, I made orders, by consent, against the second and third respondents. There was one matter left to determine, namely the question of costs as between the applicant and the second respondent. It was agreed between the parties that this issue should be determined on the papers. 2 The background to this proceeding can be summarised briefly. On 11 August 2004, the Australian Competition and Consumer Commission ("the ACCC") instituted legal proceedings in this Court against Contact Plus Group Pty Ltd ("Contact Plus"), and its sole director, Mr Arthur Spencer, alleging contraventions of the mandatory Franchising Code of Conduct ("the Code") (which is contained in the Schedule to the Trade Practices (Industry Codes - Franchising) Regulations 1998 (Cth)), and false, misleading and/or deceptive conduct in breach of the Trade Practices Act 1974 (Cth) ("the Act"). 3 Contact Plus operated a business selling licences to use its software and licensed marketing database to licensees to operate recruitment/employment service businesses. The ACCC alleged that the licence agreements entered into by Contact Plus and various licensees between August 2000 and June 2001 were franchise agreements, and that Contact Plus had contravened the Code, and as a consequence, s 51AD of the Act, by failing to provide proper disclosure documents to prospective franchisees, terminating franchise agreements without following the procedures provided under the Code, and without providing other protection afforded by it. The ACCC also alleged that Contact Plus and Mr Spencer breached ss 52, 53(a), (aa), (c) and (g) of the Act by making false, misleading and/or deceptive representations. The representations included that a licence fee of $60,000 was only payable in certain circumstances, that Contact Plus had a right to payment of the lump sum licence fee of $60,000 when no such right existed, that licensed marketing databases were "fully qualified" when they were not, and representing on its website that Contact Plus would allocate a franchisee with an exclusive area when the terms of the agreement provided otherwise. 4 The ACCC made it clear from the outset that it would be seeking a declaration that the licence agreements were franchise agreements, and therefore subject to the Code. It also made it clear that it would be seeking remedies against both Contact Plus and Mr Spencer. These included injunctions restraining them for a period of three years from engaging in similar conduct in the future, and an injunction and orders requiring them to provide copies of the Code, and a disclosure document, to current and prospective franchisees, together with documents relating to these proceedings, for a period of three years. In addition, the ACCC sought an order that Contact Plus implement a trade practices compliance program. 5 Contact Plus and Mr Spencer filed defences on 14 October 2004, and various amended defences on 9 December 2004, 8 March 2005 and 12 May 2005. On 14 June 2005, Contact Plus was placed into liquidation. On 15 September 2005, leave was granted to the ACCC to file an amended application and statement of claim joining CPG Recruitment Pty Ltd ("CPG"), the third respondent, to this proceeding. 6 Following a mediation held on 24 November 2005, the ACCC, Mr Spencer, and CPG agreed to the making of certain declarations, findings of fact, and injunctions. The liquidators of Contact Plus did not oppose the making of those orders, and accordingly, as indicated, they were made. 7 The ACCC contends that it is entitled to an order that Mr Spencer pay its costs of the proceeding, including any reserved costs. It submits that Mr Spencer's consent to the orders made on 8 February 2006 represented a "capitulation" by him in relation to the overwhelming majority of the allegations made against him, allegations which he had previously denied, both before and during the litigation. 8 Mr Spencer contends that because there was no hearing on the merits, each party should bear its or his own costs. In addition, he submits that the ACCC acted in an unreasonable and high-handed manner, and therefore should not be entitled to recover any costs against him. 9 In broad terms, the Federal Court Rules provide that where a party discontinues proceedings without the leave of the Court, the discontinuing party is liable to pay costs, unless the Court orders otherwise: see O 22 r 2 and 3, and O 62 r 26(1). No such rule is provided for where a proceeding is discontinued with the leave of the Court, although the starting point in principle is that the discontinuing party should meet the costs of the respondent: see Smith v Airservices Australia (2005) 146 FCR 37 per Stone J at [44]. 10 However, the starting point in resolving the issue is this case, namely who should bear the costs when a proceeding has been resolved by the making of consent orders, must be to consider the extent to which the ACCC succeeded in obtaining the relief that was initially sought. In that regard, the position is clear. Mr Spencer consented to the making of declarations by the Court that a series of agreements entered into by Contact Plus constituted "franchise agreements" within the meaning of clause 4 of the Code. He also consented to the making of declarations that Contact Plus had contravened the Code and therefore s 51AD of the Act, by failing to provide disclosure documents, and by failing to receive written and signed statements by the franchisees, as required. In addition, he consented to the making of directions regarding the termination of these franchise agreements, and other breaches of the Code. 11 The Court also declared, by consent, that Contact Plus had engaged in conduct that contravened ss 52 and 53(g) of the Act regarding the representations made concerning the licence fee of $60,000 and the right of a franchisee to an area that was exclusive to that franchisee. Mr Spencer was declared to have aided, abetted, counselled or procured these contraventions of the Act, and to have been directly or indirectly knowingly concerned in, or party to, those contraventions. 12 A statement of agreed facts was appended to the consent orders that were sought. That statement contains findings of fact for the purposes of s 83 of the Act. 13 Finally, Mr Spencer agreed to injunctions in the terms sought, which would run for a period of three years from the date of the order made. He accepted orders that required him to provide each person with whom Contact Plus had entered into an agreement similar in terms to those of the franchise agreements that were the subject of this proceeding with a disclosure document that complied with the requirements of the Code, and a copy of the orders of the Court. 14 The ACCC submitted that the principles governing the award of costs in cases where a matter does not proceed to a final hearing were correctly expounded by Burchett J in One.Tel Limited v Commissioner of Taxation (2000) 101 FCR 548 at 553: "In my opinion, it is important to draw a distinction between cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event or settlement so removes or modifies the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs. In the former type of case, there will commonly be lacking any basis for an exercise of the Court's discretion otherwise than by an award of costs to the successful party. It is the latter type of case which more often creates problems, since there may be difficulty in discerning a clear reason why one party, rather than the other, should bear the costs. " 15 The ACCC contended that the present case fell within the first category described by Burchett J. Although in Smith v Airservices Australia Stone J made no mention of One.Tel Limited v Commissioner of Taxation, her Honour's discussion at [48]-[59], under the heading "Futility", deals helpfully with the second category of cases that his Honour identified. 16 In this case, no event had overtaken the proceeding, and rendered the relief sought redundant. Instead, this was simply a case where, after the filing of extensive sworn evidence by the ACCC, but before the filing of any evidence by Mr Spencer, he effectively surrendered to almost all of the ACCC's claims. That surrender was said to have followed a series of positive denials by Mr Spencer and Contact Plus in their pre-litigation correspondence and in their defences. 17 Mr Spencer submitted that he had sought on a number of occasions to suggest a reasonable basis upon which this proceeding could be settled, and that the ACCC had acted unreasonably in refusing to engage with him. He referred to Australian Securities Commission v Aust-Home Investments Limited (1993) 44 FCR 194 at 201 where Hill J summarised the principles that would ordinarily apply with regard to costs when a proceeding has not gone to trial. His Honour said: "These cases seem to me support the following propositions being made. (1) Where neither party desires to proceed with litigation the Court should be ready to facilitate the conclusion of the proceedings by making a cost order: Stratford [J T Stratford & Son Ltd v Lindley (No 2) [1969] 1 WLR 1547] and the SEQEB case [South East Queensland Electricity Board v Australian Telecommunications Commission (unreported, Federal Court, 10 February 1989, Pincus J)]. (2) It will rarely, if ever, be appropriate, where there has been no trial on the merits or, for a Court determining how the costs of the proceeding should be borne to endeavour to determine the outcome of a hypothetical trial: Stratford. This will particularly be the case where a trial on the merits would involve complex factual matters where credit could be an issue. (3) In determining the question of costs it would be appropriate, however, for the Court to determine whether the applicant acted reasonably in commencing the proceedings and whether the respondent acted reasonably in defending them (SEQEB). (4) In a particular case it might be appropriate for the Court in its discretion to consider the conduct of a respondent prior to the commencement of the proceedings where such conduct may have precipitated the litigation: cf Sunday Times Newspaper Co Ltd v McIntosh (1933) 33 SR (NSW) 371. (5) Where the proceedings terminate after interlocutory relief has been granted, the Court may take into account the fact that interlocutory relief has been granted: cf Re Asiatic Electric Co Pty Ltd [1973] 1 NSWLR 603 at 606, a case which, however, depended upon the specific working of the statute under consideration." 18 Mr Spencer also drew attention to a similar statement of principle by McHugh J in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 626. 19 Mr Spencer argued that he had at all times acted reasonably in relation to the complaint brought against him by the ACCC. When the matter was first drawn to his attention, by a letter dated 14 April 2003 setting out the ACCC's concerns, he had caused his solicitors to reply to that letter, on 20 May 2003, responding in detail to the allegations. On 11 June 2003, the ACCC had written to his solicitors, thanking them for his response. That letter went on to say: "This office is currently assessing the information provided by you on behalf of your client. However, it is apparent a number of issues remain, therefore as soon as this office has completed its assessment of your response I will contact you to arrange a mutually suitable time to meet with you and your client to discuss this matter further." 20 It appears from the correspondence that was tendered before me that, despite the suggestion that there would be a meeting between the ACCC and Mr Spencer to discuss the matter further, no such meeting took place. Instead, on 11 August 2004, Deacons, acting on behalf of the ACCC, wrote to Mr Spencer's solicitors informing them that the matter had now been "fully investigated" and that the ACCC had determined to pursue it further. The letter went on to say that a proceeding had been instituted in the Federal Court that day, and enclosed a copy of the application and statement of claim. 21 Mr Spencer contends that since he considered that he had an answer to the allegations made by the ACCC, he instructed his solicitors to enter an appearance in the proceeding, and to prepare a detailed defence. He argues that the defence that was drawn did not simply join issue, but raised a series of arguable responses to the ACCC's claims. 22 Mr Spencer then submits that thereafter he repeatedly sought to engage the ACCC in discussions with a view to resolving the dispute. He exhibits to an affidavit sworn on 16 February 2006 various letters sent to the ACCC, some on a "without prejudice" basis, in which he repeatedly suggests avenues of compromise and negotiation. At no point did the ACCC give ground in relation to the relief that it sought. 23 Finally, Mr Spencer submits that he was effectively forced to agree to the ACCC's demands, and settle the proceeding, not out of any defeatist view of the merits of his case, but simply because the cost and burden of the litigation left him with little alternative. Indeed, he submitted that Contact Plus went into liquidation as a direct result of the cost of these proceedings. 24 Despite Mr Spencer's complaints, a number of which have been raised with the Ombudsman, the fact remains that at no stage prior to the mediation did he ever offer to settle this case on terms that were remotely similar to those ultimately agreed. At all times prior to the mediation, he resisted any declarations that would include a finding that the licence agreements constituted franchise agreements. He resisted any meaningful injunctions, essentially on the basis that he was no longer in the business of selling software licenses and licensed marketing databases for recruitment/employment service operations. It was only after the mediation that he capitulated in relation to these central matters. 25 In light of the very considerable difference between the position taken by Mr Spencer before the mediation, and his position after that process had been completed, it is difficult to accept his submission that the ACCC acted unreasonably in not accepting his earlier offers. There is no basis for concluding that, had the ACCC agreed to meet with Mr Spencer, prior to issuing proceedings on 11 August 2004, he would have agreed to most, if not all, of the relief that he ultimately consented to. Both in pre-litigation correspondence and in the defences filed by the respondents, the ACCC's contentions of fact and law were strongly denied. It was only after a lengthy interlocutory process, and the filing by the ACCC of affidavits, that Mr Spencer capitulated. His contention that he might have agreed to the relief subsequently ordered against him, had the ACCC engaged in meaningful negotiations with him at an earlier stage, seems to me, on the evidence, to border on the fanciful. 26 I note that Mr Spencer relies upon a statement made on 19 November 2004 by Mr John Martin, a Commissioner of the ACCC, in an address to a "Franchising Law Master Class" entitled "The ACCC & Franchising - Recent Developments and Regulatory Directions". In that address, Mr Martin said, inter alia: "The ACCC only pursues legal action when we believe that there are serious issues which must be pursued in a court of law." 27 He continued: "Where appropriate the ACCC takes an informal approach to resolving outstanding issues in a franchise system. This approach has included holding separate discussions with franchisees and franchisors in an attempt to reach a workable solution." 28 In an affidavit sworn on 24 February 2006, Ms Gina D'Ettore, the Small Business Manager (Victoria) with the ACCC, who has had responsibility for the conduct of this matter, stated that: "The ACCC instituted the proceeding because it considered that the contraventions of the Act were very serious and warranted litigation." 29 In my view, having read the various exhibits appended to the affidavits filed before me, that assessment was entirely justified. Some of the emails sent by Mr Spencer to the franchisees contained veiled threats, and did him little credit. Mr Martin's statements, in his speech, to the effect that informal discussions would be favoured as a method of resolving difficulties in a franchise relationship were prefaced by the qualification "where appropriate". In any event, and self-evidently, nothing that he said on this subject should be read as precluding the ACCC from instituting proceedings seeking declaratory and other relief in a case, such as the present, where the contraventions of the Act are serious. There is a public interest in having such conduct publicly exposed, and also in the imposition of appropriate sanctions. 30 There is one respect in which it might be thought that the ACCC's conduct perhaps warranted some criticism. It did imply, in its letter of 11 June 2003, that there would be an opportunity for Mr Spencer to meet with it before any proceedings were actually instituted. It did not say so in terms, but that seems to have been the clear tenor of the letter. It would have been fairer, in the circumstances, to have given Mr Spencer an opportunity to seek to dissuade the ACCC from taking that course. 31 However, I am in no doubt that even if such a meeting had been held, proceedings would have been instituted. The seriousness of the breaches, and the need to have the respondents' conduct publicly condemned, made that inevitable. I very much doubt that such a meeting could have produced a settlement of this matter that would have been acceptable to the ACCC, and thereby prevented additional costs from being incurred. 32 In my view, this case falls squarely within the first category of case articulated by Burchett J in One.Tel Limited v Commissioner of Taxation. The appropriate order is that the second respondent pay the applicant's costs, any such costs to be taxed in default of agreement. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Weinberg.