Commissioner of Taxation v Crown Insurance Services Ltd

LANDER AND FOSTER jj 1 On 2 November 2012, judgment was delivered in this appeal in which the majority were of the opinion that the appeal should be dismissed and the applicant should pay the respondent's costs to be taxed on a party and party basis. In those reasons, the majority rejected the respondent's written submission for indemnity costs on the ground that the applicant had unreasonably prosecuted the appeal. The respondent did not seek indemnity costs on any other ground. 2 When the orders were announced, the respondent requested the opportunity to provide written submissions to the Court for an order that the applicant pay the respondent's costs on an indemnity basis on another ground. The respondent sought costs on an indemnity basis from the time of, and on the basis of, the respondent having made an offer to compromise to the applicant, which was not accepted. 3 The ground it now advances could not be put at the hearing of the appeal because the offer of compromise would have become known to the Court. However, the respondent should not have put its application for costs in a two stage process. The respondent should have asked the Full Court at the hearing not to make any order for costs until after publication of the reasons and until the respondent could be heard. In proceeding in the way that it has, the respondent has put the applicant to increased costs and required the Court to consider the respondent's application for indemnity costs twice. 4 The proceeding before the Court was an appeal from a decision of the Administrative Appeals Tribunal (AAT) made on 30 November 2011, where the AAT set aside a decision by the applicant disallowing objections by the respondent to assessments of income tax with respect to the years ending 30 June 2004, 2005, 2006 and 2007. 5 The appeal was brought to the Court pursuant to s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (AAT Act) and the hearing of the appeal was constituted by a Full Court: s 44(3)(b). 6 Although the proceeding is described as an "appeal" in the AAT Act, it came to this Full Court in the original jurisdiction of the Court. 7 The majority was of the opinion that the appeal was incompetent because it was not brought "on a question of law". This Court's jurisdiction to hear appeals from the AAT is limited to an appeal "on a question of law": s 44(1) of the AAT Act. 8 Apparently, in a letter dated 12 March 2012, the respondent sent a Form 45 "Notice of offer to compromise" to the applicant. It was in the following terms: To the Applicant The Respondent offers to compromise this proceeding. The offer is that: 1. The Applicant discontinue this appeal; 2. The Respondent will pay to the Applicant the amount of $1,000; 3. The Applicant, within sixty (60) days, take such action that is required to implement the decision of the Administrative Appeals Tribunal at first instance, pursuant to section 14ZZL(1) of the Taxation Administration Act 1953 (Cth), including, for the avoidance of doubt: a. repayment to the Respondent of all monies paid by the Respondent to the Applicant in relation to the years under appeal (Respondent's overpayment); and b. payment of interest on the Respondent's overpayment as prescribed by the Taxation (Interest on Overpayments and Early Payments) Act 1983 (Cth); 4. Each party will bear their own costs of this appeal. This offer of compromise is open to be accepted for 14 days after service of this offer of compromise. Date: 12th March 2012. 9 The applicant did not accept the offer of compromise. 10 The respondent has filed an affidavit of its solicitor who has deposed to the respondent having incurred legal fees and outlays that would have been recoverable on a party and party basis in respect of the appeal in the sum of approximately $8,000, at the time when the letter containing the offer of compromise was sent. 11 Accordingly, the respondent claims that the offer amounted to an offer to pay or forego an amount of approximately $9,000. 12 For the reasons that follow, in our opinion, the application for indemnity costs should be dismissed. 13 Section 43 of the Federal Court of Australia Act 1976 (Cth) provides that, except as provided by any other Act, the award of costs is in the discretion of the court or a judge: s 43(2). Part 25 of the Federal Court Rules 2011 (FCR 2011) empowers a party to make an offer to compromise by serving a notice in accordance with Form 45 on another party: rule 25.01. The content of the offer of compromise is provided for in rule 25.03 and the notice must state whether the offer is inclusive of costs or costs are in addition to the offer. If the offer is for a sum of money, the notice may separately specify the amount that represents the offer in respect to the claim, and interest if any. The respondent's offer of compromise was in accordance with the FCR 2011. 14 Before addressing the relevant rules that address the consequences in costs of a party failing to accept an offer of compromise in the FCR 2011, it is instructive to have regard to the Federal Court Rules (FCR) now repealed and two decisions on the construction of those rules. 15 Order 23 rule 11 of the FCR provided for the consequences in costs if a party failed to accept an offer of compromise. 16 Prior to 2 August 2008, O 23 r 11 did not include a subrule (6) in the form in which it was later included. The rule which then addressed offers of compromise by a respondent was O 23 r 11(5), which provided: (5) If: (a) an offer is made by a respondent and not accepted by the applicant; and (b) the applicant obtains judgment on the claim to which the offer relates not more favourable than the terms of the offer; then, unless the Court otherwise orders: (c) the applicant is entitled to an order that the respondent pay the applicant's costs in respect of the claim incurred up to 11 am on the day after the day when 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. 17 In Dukemaster Pty Ltd v Bluehive Pty Ltd [2003] FCAFC 1, the Full Court held that O 23 r 11(5) had no application where a respondent's offer had been rejected by an applicant in circumstances where the applicant's application was later dismissed: at [6]. In that decision, the Full Court held that the mere making of an offer of compromise and its non-acceptance, followed by a result more favourable to the offeror, did not automatically lead to an order for costs on an indemnity basis. Sundberg and Emmett JJ held that a party seeking a more generous costs order would have to show that the rejection of the offer was imprudent and plainly unreasonable: at [7]. 18 In Seven Network Limited v News Limited [2009] FCAFC 166, 22 respondents (including Telstra) to a proceeding brought by Seven Network Limited and others made a joint offer of compromise, the terms of which included an offer to pay $10 million to the applicants and to pay the applicants' costs. The offer was rejected. The applicants' proceeding was later dismissed. The respondents sought costs on an indemnity basis relying upon the rejected offer. 19 Justice Sackville who, following delivery of the first instance judgment, delivered judgment on the application for indemnity costs and held himself bound by Dukemaster Pty Ltd v Bluehive Pty Ltd to reject that application, the result of which he described as "anomalous": Seven Network Limited v News Limited [2007] FCA 1489 at [57]. He said, after referring to Dukemaster Pty Ltd v Bluehive Pty Ltd, at [59]: It follows that there is a disconformity between the approach that, in my view, should be taken in a case such as this and the approach that Dukemaster requires me to take. For present purposes, Dukemaster holds that the applicant's (sic) rejection of an offer of compromise made by a respondent pursuant to O 23, where the applicant wholly fails in the proceedings, will not ordinarily lead to an award of indemnity costs against the unsuccessful applicant unless the rejection of the offer was "imprudent or unreasonable". It is that holding I must apply to the circumstances of this case. 20 His Honour went on to consider whether the applicant's failure to accept the offer was imprudent or unreasonable, but held that that had not been established: at [81]. 21 Telstra appealed against the order refusing the respondents' indemnity costs and contended that the decision in Dukemaster Pty Ltd v Bluehive Pty Ltd was plainly wrong. It was not argued that if the Full Court did not accept that Dukemaster Pty Ltd v Bluehive Pty Ltd was plainly wrong that Sackville J was wrong to conclude that the applicants had not been imprudent or unreasonable in rejecting the offer. 22 The Full Court rejected the contention that Dukemaster Pty Ltd v Bluehive Pty Ltd was plainly wrong. It was of the opinion, like the Full Court in Dukemaster Pty Ltd v Bluehive Pty Ltd, that O 23 r 11(5) had no application in circumstances where an applicant's proceeding wholly failed. 23 The Full Court said at [1109]-[1112]: [1109] In our opinion, the subrule has no application to the circumstances which were before his Honour. He was right to follow the decision in Dukemaster Pty Ltd v Bluehive Pty Ltd [2003] FCAFC 1. It may be thought that the decision leads to an anomalous result. However, where an applicant has failed and there is no disqualifying conduct, it has to pay the respondent's costs on a party and party basis. The respondent can seek a more favourable order if it can show that there is some special or unusual feature of the case which would enliven the discretion to order costs on an indemnity basis. A special or unusual feature might be that the applicant's conduct was "imprudent or unreasonable", but that will involve the exercise of discretion. [1110] If the rule simply provided that, where an offer has been made and rejected, an unsuccessful applicant must pay a successful respondent's costs on an indemnity basis then all respondents, even those who believed the proceeding would be dismissed, would be wise to file an offer for an amount which an applicant would have to refuse. The respondent would thereafter have the advantage of conducting the case knowing that if it lost it would have to pay costs on a party and party basis but if it won it would be entitled to costs on an indemnity basis. A rule in those terms might lead to injustice. Moreover, a rule in those terms would be likely to change the usual rule for costs against an applicant to indemnity costs rather than party and party costs. [1111] It may be better as the rules and the authorities presently provide that when an applicant is wholly unsuccessful the applicant pay costs on a party and party basis, unless there is some special or unusual feature, or the justice of the case requires. A special or unusual feature might be an applicant failing to accept an offer in circumstances which are "imprudent or unreasonable". [1112] In our opinion, the decision of this Court in Dukemaster Pty Ltd v Bluehive Pty Ltd [2003] FCAFC 1 is not plainly wrong or, indeed, wrong. The criticism of the Full Court in failing to analyse the rule is, with respect, misconceived. There is not much more that can be said but that the subrule does not apply. 24 Telstra's appeal against the order refusing indemnity costs was dismissed. 25 Between Sackville J's decision on 26 September 2007, and the Full Court decision on 2 December 2009, the FCR were amended on 2 August 2008 to include O 23 r 11(6), which then provided: (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. 26 That rule allowed a respondent to claim costs on an indemnity basis if the respondent had made an offer, which had not been accepted by the applicant, and the respondent obtained an order or judgment on the claim to which the offer relates that was as or more favourable to the respondent than the offer. It therefore applied where an applicant's proceeding was dismissed. It addressed the situation that Sackville J described as "anomalous". 27 However, that rule suffered from the vice identified by the Full Court in Seven Network Limited v News Limited [2009] FCAFC 166 at [1110]. 28 Rules 25.14(1) and (2) of the FCR 2011 address the consequences in costs for an applicant failing to accept a respondent's offer of compromise. They provide: (1) If an offer is made by a respondent and not accepted by an applicant, and the applicant obtains a judgment that is less favourable than the terms of the offer: (a) the applicant is not entitled to any costs after 11.00 am on the second business day after the offer was served; and (b) the respondent is entitled to an order that the applicant pay the respondent's costs after that time on an indemnity basis. (2) If an offer is made by a respondent and an applicant unreasonably fails to accept the offer and the applicant's proceeding is dismissed, the respondent is entitled to an order that the applicant pay the respondent's costs: (a) before 11.00 am on the second business day after the offer was served - on a party and party basis; and (b) after the time mentioned in paragraph (a) - on an indemnity basis. 29 Rule 25.14(2) is couched in different terms to rule 25.14(1), which applies when a respondent has made an offer and the applicant succeeds in the proceeding, but obtains a judgment that is less favourable than the terms of the offer. Rule 25.14(1) does not require an examination as to whether the applicant unreasonably failed to accept the offer as is required in rule 25.14(2). The costs consequences, subject of course to the exercise of discretion, follow if the applicant obtains a judgment less favourable than the respondent's offer. 30 Rule 25.14(2) applies where the respondent has served an offer of compromise on the applicant and the applicant's proceeding is subsequently dismissed. It addresses the circumstance addressed by O 23 r 11(6) of the FCR as they appeared from 2 August 2008. 31 Rule 25.14(2) requires an investigation into whether the applicant has unreasonably failed to accept the offer before the respondent is entitled to indemnity costs after the offer was served. 32 If rule 25.14(2) were in similar terms as rule 25.14(1), a respondent could put himself or herself at an advantage by filing an offer for $1, and if the applicant's proceeding were dismissed, the respondent could claim to be entitled to costs on an indemnity basis for that offer, which was never a genuine offer to settle the proceeding. That result was recognised, as the Full Court had in Seven Network Limited v News Limited, as being an unfair result. Rule 25.14(2) has been drawn so that if the respondent makes an offer of compromise, it has to be an offer that the applicant has unreasonably failed to accept before the respondent can rely upon the offer for obtaining an order for indemnity costs. 33 The amount of the offer that the respondent made in this proceeding bears no relationship to the amount of tax that was said to be involved. The assessment of taxable income for the years ending 30 June 2004, 2005, 2006, and 2007 was $561,668, $673,276, $1,077,957, and $1,817,845 respectively. It could not be expected that the applicant would have settled for $1,000 and for the forgiveness of costs of $8,000. 34 In our opinion, it may be inferred that the offer was made simply for the purpose of trying to obtain an advantage in case the applicant's appeal was dismissed. This offer was of a kind that rule 25.14(2) of the FCR 2011 guards against to prevent unfairness. The rule is designed to encourage genuine offers of compromise. An offer of $1,000 together with forgiveness of costs of $8,000 is not an offer that bore any commercial relationship to the dollar value of the dispute. The respondent has the onus of establishing that the appellant unreasonably failed to accept the offer of compromise. That onus has not been discharged. We are not satisfied that the applicant has unreasonably failed to accept the offer and, therefore, we would not allow the respondent the benefits in rule 25.14(2). 35 However, there is another reason why, in our opinion, the application should be refused. 36 The majority were of the opinion that the appeal should be dismissed because the appeal was incompetent because it was not brought "on a question of law". 37 Division 33.2 of the FCR 2011 deals with appeals from the AAT. Rule 33.30 provides that a respondent who objects to the competency of an appeal must file a notice of objection to competency within 14 days after being served with the notice of appeal. The notice of appeal in this appeal was served prior to 10 January 2012, because that was the date upon which the respondent filed its notice of address for service. 38 No notice of objection to competency was filed until the day the appeal came on for hearing on 21 May 2012. 39 The respondent failed to comply with rule 33.30 and, therefore, did not allow the applicant to consider its position in relation to competency at any time prior to the hearing of the appeal. As the applicant has submitted, if the respondent had complied with rule 33.30, the applicant would have been served with a notice of objection to competency before the respondent's offer was made. As it happens, the respondent's objection to competency, which was the ground upon which the respondent succeeded, was only filed after the respondent's offer had expired. In those circumstances, it would be unfair to visit indemnity costs upon the applicant. 40 In our opinion, the respondent's application for indemnity costs should be dismissed. The respondent should pay the applicant's costs of the respondent's application for indemnity costs after 2 November 2012. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Lander and Foster.