Clark v Commissioner of Taxation

Federal Court of Australia|2010-08-18|Before: Greenwood J, Kiefel J

Background 1 The question for resolution in this application is the disposition of the costs relating to the "costs hearing" consequent upon the judgment in Clark v Commissioner of Taxation [2010] FCA 415 in which the following orders were made:

The respondent pay the costs of the applicants of and incidental to the proceeding up to and including 9 December 2008 on a party and party basis;
The respondent pay the costs of the applicants of and incidental to the proceeding from 10 December 2008 on an indemnity basis;
The respondent pay reserved costs of the proceeding reserved prior to 9 December 2008 on a party and party basis (save for those costs already ordered to be paid by Greenwood J on 12 August 2008 and Kiefel J on 7 February 2007).
The costs of the application for an Order for indemnity costs are reserved for brief further submissions having regard to the published reasons. 2 The parties have filed and served written submissions pursuant to Order 4.

The costs judgment 3 There were three issues to be determined by the costs judgment. The first two issues were put in the alternative and the third issue stood independently. 4 First, whether Order 23 of the Federal Court Rules applies to a proceeding concerning an appeal to the Federal Court from the Commissioner's objection decision under s 14ZZ of the Taxation Administration Act 1953 (Cth) ("the TA Act") and if so whether the offer of compromise made by each applicant dated 9 December 2008 satisfied the elements of Order 23. On this issue Mr and Mrs Clark were successful. 5 Secondly, if Order 23 does not apply to such a proceeding, whether the Commissioner's refusal to accept the offer of 25 November 2008 was unreasonable in the circumstances so as to justify an award of indemnity costs from 25 November 2008. On this issue the Commissioner was successful. 6 Thirdly, whether the Commissioner's election to put the applicants to proof of the cost base issue was unreasonable in the circumstances so as to justify an award of indemnity costs in respect of that issue. On this question the Commissioner was successful.

The parties' submissions 7 The applicants submit that the respondent should pay its costs of the costs hearing on an indemnity basis for two alternative reasons. 8 First, costs should follow the event and there is no reason to make any allowance for the costs of an argument in respect of which the applicants failed because no further time than had been set down was required of the court. Reliance is placed upon the observations of Spender J in Ramsden v Federal Commissioner of Taxation [2004] FCA 681 at [11] in these terms: In all the circumstances, the fact that in some matters the applicants have been unsuccessful, is not a basis on which the ordinary rule as to costs should not apply. The particular circumstances of this case are that all of the appeals were argued in a day, so that there is no realistic basis on which there can be an apportionment of costs on the basis of separate issues. 9 Secondly, the costs under consideration are costs in the proceedings and therefore fall within the offer of compromise by the applicants made under Order 23 of the Federal Court Rules. Since the applicants obtained judgment not less favourable than the terms of the offer, the applicants say they are presumptively entitled to an order against the Commissioner for costs incurred in respect of the claim after the date of the offer on an indemnity basis. 10 The Commissioner however submits that there should be no order as to costs in the costs hearing for these reasons. 11 First, the Commissioner says that costs should reflect the mixed outcome of the costs hearing. Here, the parties have had mixed success. The Commissioner says that the applicants' claim for indemnity costs up until 9 December 2008 both in respect of the Calderbank offer and in respect of the costs base question was successfully resisted. Further, the Commissioner notes that some of the contentions of the applicants were abandoned at the hearing. 12 Secondly, the Commissioner says that the costs of the application for indemnity costs are not within the scope of the applicants' Order 23 offer. While the Commissioner concedes that the costs proceedings were proceedings "in connection with" the principal proceedings within the meaning of s 4 of the Federal Court of Australia Act 1976 (Cth) ("the Federal Court Act"), the Commissioner says that the costs proceedings are nonetheless different proceedings on the basis of the reasoning of the Full Court in IMF (Australia) Ltd v Meadow Springs Fairway Resort Ltd (in liq) No 2 [2009] FCAFC 69 at [34].

Do the costs of the costs hearing fall within Order 23? 13 Order 23 r 11 provides, relevantly, as follows: 11 Costs (4) If: (a) an offer is made by an applicant and not accepted by the respondent; and (b) the applicant obtains judgment on the claim to which the offer relates not less favourable than the terms of the offer; then, unless the Court otherwise orders, the applicant is entitled to an order against the respondent for costs incurred in respect of the claim: (c) up to and including the day the offer was made - taxed on a party and party basis; and (d) after that day - taxed on an indemnity basis. [emphasis added] 14 Order 23 r 2(1) provides: In any proceeding, a party may make to another party an offer to compromise any claim in the proceeding on the terms set out in the notice of offer. [emphasis added] 15 Order 23 draws attention to the expressions "any proceeding" and "any claim in the proceeding".

"Any proceeding" 16 The expression "proceeding" is defined in s 4 of the Federal Court Act. As the power to make Rules of Court is contained in s 59 of the Federal Court Act, the definitions contained in the Act necessarily extend to the Rules, unless otherwise stated. Section 4 provides, relevantly: 4 Interpretation In this Act, unless the contrary intention appears: […] "proceeding" means a proceeding in a court, whether between parties or not, and includes an incidental proceeding in the course of, or in connexion with, a proceeding, and also includes an appeal. 17 The definition of "proceeding" in s 4 of the Federal Court Act applies for the purposes of Order 23 subject to the exclusionary qualification contained in Order 23, r 1. 18 Order 23, r 1 qualifies the definition as follows: proceeding does not include a proceeding on an interlocutory application that is not capable of: (a) substantially disposing of the proceeding or of the whole or any part of any claim for relief in the proceeding; or (b) rendering unnecessary any trial or further trial in the proceeding or of the whole or any part of any claim for relief in the proceeding. 19 "Proceeding" is not otherwise defined in either O 23 or in O 1 r 4, which provides for the interpretation of terms contained in the Rules as a whole. 20 At [14] of the costs judgment, I said: Accordingly, Order 23 applies to any proceeding although not a proceeding consisting of an interlocutory application not capable of substantially disposing of the proceeding or rendering any trial in the proceeding unnecessary. Otherwise, the Order has broad application by force of the definition of "proceeding". 21 The substantive proceeding in the present case was an appeal against the respondent's objection decision pursuant to s 14ZZ of the TA Act. As I noted at [20] of the costs judgment O 52B, "addresses the procedural mechanism for commencing and maintaining a proceeding in the Court arising under s 14ZZ of the TA Act". The application for costs does not fall within the exclusion contained in O 23, r 1 as it is not a separate "proceeding on an interlocutory application". It was an application directed to the final disposition of the costs of the proceeding and part of the final relief in that proceeding. 22 Accordingly, the application for costs falls within the definition of a "proceeding" to which O 23 applies. 23 The next question is whether the application for costs is part of the same proceeding as the substantive s 14ZZ proceedings or whether it is a separate proceeding, or a separate claim in the proceedings.

"Claim in the proceeding" 24 Order 23, r 1 defines "claim in the proceeding" as follows: claim in the proceeding includes a claim in relation to costs to which Order 62 applies. 25 The expression "claim in the proceeding", by its ordinary and natural meaning, contemplates that a "claim" is a subset of a "proceeding". A "proceeding" may be made up of multiple "claims". By O 23, r 1, a "claim in the proceeding" includes a claim in relation to costs to which Order 62 applies. Order 62, r 2 provides: The provisions of this Order apply to costs payable or to be taxed under any order of the Court, or under the Rules, and costs to be taxed in the Court under any Act. 26 Since a "claim in the proceeding" includes a claim in relation to costs to which O 62 applies, it includes a claim for costs in relation to an offer of compromise made under O 23, r 11(4). Order 23, r 2(1), provides: In any proceeding, a party may make to another party an offer to compromise any claim in the proceeding on the terms set out in the notice of offer. [emphasis added] 27 While the rule is expressed to apply to a compromise of any "claim" in the proceeding, the offer to compromise need not be limited to a claim, as opposed to multiple claims, that is, the entire bundle of claims in the proceeding. A question of construction as to the width of the particular offer therefore arises. 28 The respondent relies upon the Full Court decision of this Court in IMF (Australia) Ltd v Meadow Springs Fairway Resort Ltd (in liq) No 2 [2009] FCAFC 69. That case concerned an O 23 offer of compromise made by IMF (Australia) Ltd ("IMF") in the proceeding which concerned an application under s 511 of the Corporations Act 2001 (Cth) in which IMF contended that it was entitled to payment out of a particular fund in priority to others. IMF did not obtain a better result than that contained in its offer of compromise made in the course of the proceeding. However, IMF did achieve a better result than that contained in its offer of compromise as a result of the orders of the Full Court on appeal. The question, so far as it related to costs, was whether the offer of compromise made for the purposes of O 23 extended to bring about the presumptive result in the appeal proceedings as that ultimately brought about in the principal proceedings by reason of the orders the Full Court ultimately made. The Full Court, constituted by North, Emmett and Rares JJ, said this at [34]: 34. The appeal from the orders made in the s 511 Proceeding is a different proceeding from the s 511 Proceeding itself. The definition of proceeding in s 4 of the Federal Court Act includes an appeal. However, the amplificatory definitions of claim in the proceeding and proceeding in O 23 r 1 suggest that the use of the word proceeding in O 23 is related to one, but not both, of a proceeding in the original and a proceeding in the appellate jurisdiction of the Court. A claim in the appellate jurisdiction is different from a claim in the original jurisdiction. Ordinarily, the claim in an appeal by way of rehearing is to change or sustain the orders made in the proceeding below because of the demonstration of, or the failure to demonstrate, an error by the primary judge in arriving at the orders the subject of the appeal (see Coal & Allied Operations Pty Ltd v Australian Industrial Relations Commission (2000) 203 CLR 194 at 203-204 [14]). So, a compromise of an appeal will require additional orders, even if formal, to those sought or resisted in the original jurisdiction … [original emphasis] 29 Their Honours continued, at [35], [36] and [37]: 35. No offer to compromise IMF's appeal was made by IMF. … IMF contends, however, that the presumption raised by Rules 11(4) and (5) applies not only to the proceeding in which an offer of compromise is made but in any appeal in which the claims that were the subject of the offer of compromise are in issue. Certainly, the question as to IMF's entitlement to payment of the two sums, which was raised in the s 511 Proceeding and the cross‑claims, was a hotly contested issue in the appeals. 36. While the matter is certainly not without doubt, the better view is that, once a proceeding in which an offer of compromise in accordance with Order 23 has been disposed of, the offer of compromise should be regarded as spent. That is not to say that, if the orders disposing of the proceeding are disturbed on appeal, the offer of compromise will not have effect for the proceedings at first instance, including any retrial or further hearing on a remittal (see Ettinghausen v Australian Consolidated Press (1995) 38 NSWLR 404 at 410). Thus, in the present case, the result, so far as IMF is concerned, is more favourable to it, following the appeal. Accordingly, the presumption raised by rule 11 now applies to the s 511 Proceeding, in the light of the orders that will be made in the s 511 Proceeding following the appeal. Thus, the costs of the s 511 Proceeding should be taxed on an indemnity basis after the date of the Compromise Offer. 37. However, Order 23 does not give rise to a presumption of entitlement to have costs taxed on an indemnity basis in an appeal brought in a different proceeding altogether from the proceeding in which the offer of compromise was made and rejected. Order 23 should not be construed, for example, as applying to an appeal from an order of a court other than the Federal Court. Nor should it be construed as giving an entitlement to costs in an appeal from orders of the Federal Court to a court other than the Federal Court. [emphasis added] 30 These passages do not assist the respondent. As the passages make plain, an appeal is a different proceeding from the proceeding at trial, even though, of course, the separate primary proceeding and the proceeding on appeal are necessarily related to each other. The substantive trial of the action and the ultimate trial of the costs of the action are claims within the same proceeding commenced within the original jurisdiction of the Court. 31 Accordingly, an O 23 offer of compromise is capable of extending to encompass the entire "proceeding", understood in an amplificatory sense, within the original jurisdiction of the Court.

Do the applicants' offers of compromise extend to the claim for costs? 32 The applicants made an offer of compromise in respect of each of the two proceedings pursuant to O 23. The offers were dated and served on 9 December 2008 and were in the following terms: To: The Commissioner of Taxation … The Applicant hereby offers to settle all claims in this proceeding [the same offer was made in each proceeding] on the following terms: 1. The Respondent consents to an order varying the appealable objection decision made by the Respondent on 27 October 2006 disallowing the Applicant's objection to the notice of amended assessment issued for the year of income ended 30 June 2001 to allow the objection. 2. The Respondent withdraws the notice of amended assessment issued for the year of income ended 30 June 2001. 3. The parties bear their own costs of the proceeding (and the Applicant foregoes the benefit of any existing costs orders). This offer is made under Order 23 of the Federal Court Rules and remains open for acceptance for a period of 14 days from the date the offer is made. Signed: Solicitor for the Applicant 9 December 2008 [emphasis added] 33 Each offer was not only comprehensive but conclusive. Each was expressed to cover "all claims in this proceeding". This includes any claim as to costs. 34 The orders made in the costs judgment of 30 April 2010 were that the respondent pay the applicants their costs on the standard basis up to and including 9 December 2008 and on an indemnity basis thereafter. As the applicants have obtained judgment on the claim to which the offer relates that is not less favourable than the terms of the offers made, they are presumptively entitled to costs of the costs proceeding on an indemnity basis. Although O 23, r 11(4) gives rise to a presumptive entitlement, that entitlement is predicated upon the exercise of a discretion conferred by the words "unless the Court otherwise orders". There is of course a broad discretion conferred by s 43(2) of the Federal Court Act and the Court or a Judge may "make different awards of costs in relation to different parts of the proceeding": s 43(3)(b). The respondent, however, must demonstrate compelling and exceptional circumstances to support a different form of order: Port Kembla Coal Terminal Limited v Braverus Marine Inc. (No. 2) (2004) 212 ALR 281 at [16] to [18]. No compelling and exceptional circumstances have been demonstrated. Accordingly, the applicants are entitled to their costs of the costs hearing on an indemnity basis.

Should the issues be assessed separately for the purpose of costs? 35 Apart from O 23, the following considerations would arise. 36 In Dr Martens Australia Pty Ltd v Figgins Holdings Pty Ltd (No 2) [2000] FCA 602 at [54], Goldberg J said: [A] court should be reluctant to embrace the proposition that, as a general rule, it is appropriate to undertake an [i]nquiry as to who was successful in relation to particular issues in a case to determine whether there should be an apportionment of costs against a successful party. 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. See also Black & Decker Inc v GMCA Pty Ltd (No 3) [2008] FCA 932 at [7] per Heerey J. 37 In BHP Coal Pty Ltd & Ors v O & K Orenstein & Koppel AG & Ors (No 2) [2009] QSC 64, McMurdo J had to consider the proper operation of r 684 of the Uniform Civil Procedure Rules 1999 (Qld) in light of r 681(1). Rule 681(1) provides: 681 General rule about costs Costs of a proceeding, including an application in a proceeding, are in the discretion of the court but follow the event, unless the court orders otherwise. Rule 684 provides: 684 Costs of question or part of proceeding (1) The court may make an order for costs in relation to a particular question in, or a particular part of, a proceeding. (2) For subrule (1), the court may declare what percentage of the costs of the proceeding is attributable to the question or part of the proceeding to which the order relates. 38 McMurdo J at [8] expressed the principle thus: [O]rdinarily the fact that a successful plaintiff fails on particular issues does not mean that the plaintiff should be deprived of some of its costs, although it may be appropriate to award costs of a particular question or part of a proceeding where that matter is definable and severable and has occupied a significant part of the trial. See also Ramsden v Federal Commissioner of Taxation [2004] FCA 681 at [11] per Spender J; Waterman v Gerling Australia Insurance Co Pty Ltd (No 2) [2005] NSWSC 1111 at [10] per Brereton J; AGL Energy Ltd v Queensland Competition Authority (No 2) [2009] QSC 116 at [11]-[13] per McMurdo J; Alborn v Stephens [2010] QCA 58 at [8] per Muir JA (Holmes JA and Daubney J agreeing). 39 For present purposes, s 43(3)(b) is in essentially the same terms as r 684(1) of the Uniform Civil Procedure Rules (Qld). The principle propounded by McMurdo J applies with equal force to the exercise of the discretion as to costs under the Federal Court Act. 40 In the present case, the applicants succeeded on the first issue but failed on the second and third issues. Each issue was severable and definable. The first and second were alternative arguments; only the third stood independently. However, the field of the arguments were completed in less than a day. It is not realistic to isolate the time spent on each issue. The applicants should have their costs of the costs hearing. 41 Apart from the operation of O 23, the applicants, however, seek their costs on an indemnity basis. Apart from O 23, they have not demonstrated any exceptional circumstances justifying such an order and thus, absent the application of O 23, costs would be awarded on a party and party basis.

Conclusion 42 However, O 23 extends to the entire proceeding, including the hearing on costs. The applicants' offer encompassed the entire proceeding. As the applicants obtained judgment "no less favourable" than the offer, and no basis for displacing the presumptive entitlement is demonstrated, the respondent must pay the applicants' costs of the costs hearing on an indemnity basis. 43 Alternatively, had O 23 had no application, the appropriate order would be an order that the respondent pay the applicants' costs on a party and party basis. I certify that the preceding forty‑three (43) numbered paragraphs is a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood.

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