Cosmetic Suppliers Pty Ltd and Another v Great Scott International Pty Ltd and Another

CORAM: Wright J President; Walton J Vice-President; Backman J

CATCHWORDS: Costs - unfair contract - appeal - offer of compromise - Calderbank offer made by respondents prior to hearing on appeal - offer rejected by appellants - appellants unsuccessful on appeal - orders on respondents' claim at first instance more favourable than offer of compromise - whether appellants' rejection of offer was reasonable - discretionary factors taken into account - appellants' rejection of offer held not reasonable - appellants ordered to pay indemnity costs from date offer made.

LEGISLATION CITED: Industrial Relations Act 1996 s 106(5) Industrial Relations Commissions Rules 1996 r 166, r 216(4) and r 203(1)

Ballard v Incoll Management (No 2) [2001] NSWIRComm 217 Bell & Berg v Macquarie Bank Limited and Anor [2003] NSWIRComm 21 Bowman v Ricegrowers Limited (formerly Ricegrowers' Co-operative Limited) (No 2) [2007] NSWIRComm 267 CASES CITED: Burgess & Ors v Mount Thorley Operations Pty Limited [2003] NSWIRComm 22 Cosmetic Suppliers Pty Ltd & Anor v Great Scott International Pty Ltd & Anor [2007] NSWIRComm 257 Great Scott International Pty Limited & Anor v Cosmetic Suppliers Pty Limited & Anor (No 2) [2006] NSWIRComm 358 Irving v Jones Lang LaSalle Australia Limited and another (No 3) [2007] NSWIRComm 194

APPELLANTS Mr J J E Fernon SC Baker & McKenzie (Mr P Brown) LEGAL REPRESENTATIVES:

RESPONDENTS Mr S Jauncey Henry Davis York Lawyers

CORAM: WRIGHT J, President WALTON J, Vice-President BACKMAN J Thursday 14 February 2008

COSMETIC SUPPLIERS PTY LTD AND ANOTHER v GREAT SCOTT INTERNATIONAL PTY LTD AND ANOTHER

Application by Cosmetic Suppliers Pty Ltd for leave to appeal and appeal against a judgment and orders of Justice Staff given on 13 November 2006 in Matter No IRC 4548 of 2002

1 The Full Bench delivered judgment in this matter on 16 October 2007: Cosmetic Suppliers Pty Ltd & Anor v Great Scott International Pty Ltd & Anor [2007] NSWIRComm 257. Leave to appeal was granted and the appeal was dismissed. The Full Bench made the following order as to costs: The appellants are to pay the respondents' costs of the appeal as agreed or as assessed; as well as the respondents' costs of the notice of motion for security for costs heard before Backman J on 28 February 2007 as agreed or assessed. 2 On 22 November 2007, the trial judge, Staff J, ordered the appellants to pay the respondents' costs of the proceedings at first instance on a party and party basis up to 10 March 2005 and thereafter on an indemnity basis (Great Scott International Pty Limited & Anor v Cosmetic Suppliers Pty Limited & Anor (No 2) [2006] NSWIRComm 358). The background to the order was that the respondents (the applicants at first instance) had provided to the appellants an offer of compromise dated 10 March 2005. On 12 April 2006, a second offer of compromise was served by the respondents on the appellants. It was clear in the proceedings at first instance that both offers fell significantly below the amounts ordered to be paid under the judgment orders made by Staff J. 3 By way of notice of motion filed on 14 November 2007 the respondents claim their costs of the appeal on a party and party basis from 1 December 2006 to 26 April, 2007 and thereafter on an indemnity basis. The background to the present application concerns an offer made by the respondents to settle the appeal proceedings in a letter sent to the appellants on 26 April 2007. The offer was not accepted by the appellants. The dismissal of the appeal operated to lift a stay of the orders made at first instance by the President on 20 December 2006. As a result of the orders made by the Full Bench on 16 October 2007, the respondents contend that they have obtained orders more favourable to them than the terms of the offer set out in the letter dated 26 April 2007. There does not appear to be any issue about this, and the appellants in submissions have not suggested otherwise. 4 As a preliminary matter it should be noted that the respondents' notice of motion moves the Full Bench for orders under rules 216(4) and 203(1) of the Industrial Relations Commissions Rules 1996 (IRC Rules). Rule 216(4) provides:- 216 Offer of compromise (4) Where an offer is made by an applicant and not accepted by the respondent, and the applicant obtains an order on the claim to which the offer relates no less favourable than the terms of the offer, then, unless the Commission otherwise orders, the applicant shall be entitled to an order against the respondent for costs in respect of the claim from the day on which the offer was made, assessed on an indemnity basis in addition to costs incurred before and on that day, assessed on a party and party basis. 5 The letter of 26 April 2007, however, is expressed in terms of a Calderbank type offer. The letter is headed, "Without Prejudice Save as to Costs". At the foot of the letter appear the words; Calderbank offer

We put you on notice that should this offer not be accepted, our clients will rely on this letter on the question of the costs of the Appeal in accordance with the principles enunciated in Calderbank v Calderbank 1976 Fam 93. 6 The appellants have objected to the respondents' construction of the offer of compromise as one made under the IRC Rules. According to the appellants, the offer made is a Calderbank type offer. 7 The particular provision of the IRC Rules as well as the express reference in the letter to a reliance on the principles applicable to Calderbank type offers would appear to confirm the appellants' contention. Rule 166 of the IRC Rules, for example, provides: 166 Mode of making offer

(1) An offer or compromise is made to a party under this Part by serving a notice of the offer on the party.

(2) A notice of offer must: (a) be prepared in accordance with directions in Schedule 1 of these Rules, and

(b) bear statement to the effect that the offer is made in accordance with this Part.

There is nothing on the face of the letter which outlines the offer of compromise, to suggest that it has been prepared in accordance with the directions in Schedule 1. Nor does the letter contain a statement in accordance with sub rule 166(2)(b). 8 The approach to the issue of whether to make costs orders sought by way of Calderbank type offers has been adverted to in a number of authorities in this jurisdiction: Ballard v Incoll Management (No 2) [2001] NSWIRComm 217 at [17] and [18]; Burgess & Ors v Mount Thorley Operations Pty Limited [2003] NSWIRComm 22 at [59]; Bell & Berg v Macquarie Bank Limited and Anor [2003] NSWIRComm 21 at [20]; Irving v Jones Lang LaSalle Australia Limited and another (No 3) [2007] NSWIRComm 194 at [20]. In Ballard v Incoll, Boland J conveniently discusses the relevant approach: [17] In determining the question of costs in this matter I adopt a similar approach to that taken by Rolfe J in Multicon Engineering , namely, there is a prima facie presumption that an order for indemnity [in this case, party and party] costs should be made if an offer of settlement was made, rejected and not bettered in litigation, unless the party rejecting the offer establishes that it was reasonable for it not to accept the offer. The exercise of judicial discretion with respect to costs, however, depends upon a consideration of the particular facts and circumstances.

[18] Clearly in this case a genuine offer of settlement was made, rejected and not bettered in litigation. The onus, therefore, falls on the applicant to establish that it was reasonable for him not to accept the offer. On the question of costs the applicant was represented in person and he was unable to express any relevant basis as to why it was reasonable for him not to accept the offer. He did refer to the respondent having prolonged the proceedings by changing the basis of its opposition but there is no substance in this contention. 9 A guiding principle, associated with Calderbank type offers, generally made, is that the successful party to the appeal should only be deprived of the benefit of a costs order if the unsuccessful party acted reasonably in rejecting the offer. It is relevant when considering whether or not the rejection of the offer was reasonable, to look at all the circumstances surrounding the making of the offer: see for example Bell & Berg v Macquarie Bank at [22]. 10 It becomes necessary at this point to set out in full the terms of the offer presently under consideration:- Settlement offer We are instructed that in the interests of resolving the Appeal, our clients are willing to settle the matter on the following basis: 1. That, in lieu of order 2 made by Staff J, Cosmetic Suppliers Pty Limited ( CS ) is to pay to Great Scott International Pty Limited ( GSI ) the sum of $50,000 (with GSI and Mr Krauss consenting, without admission, to leave to appeal being granted, the Appeal being upheld to this extent, an order to this effect being made in substitution for order 2 of the orders made by Staff J, but the Appeal being otherwise dismissed); 2. That interest be paid on the sum of $50,000 in accordance with order 3 made by Staff J (which, for the avoidance of doubt, would in our view result in interest being calculated in accordance with the Supreme Court scale from the date of filing the summons for relief (7 August 2002) until the date of judgment on 13 November 2006, with interest thereafter accruing in accordance with section 101 of the Civil Procedure Act 2005 );

That the respondents will pay the applicants' costs of proceedings 4548 of 2002 in accordance with order 4 of the orders made by Staff J on 13 November 2006, subject to any subsequent orders made by Justice Staff as a consequence of the notice of motion filed on 6 February 2007;

That the stay or orders 3 and 4 of the orders made by Staff J on 13 November 2006 be lifted with effect from the date of acceptance of this offer (and with the order set out in paragraph 1 not being subject to any stay);

That the amounts owed under paragraphs 1 and 2 above are payable within seven days of the date of acceptance of the offer. If not, then the solicitor for GSI, presently Stephen Michael Jauncey, acting on behalf of GSI, would by entitled to make demand for payment of the relevant amounts under the Bankers Undertaking dated 13 December 2006 on the basis that they are regarded as amounts "liable to be paid pursuant to the Orders of the Trial Judge or subsequent order of the Count in the Appeal Proceedings" for the purposes of the deed dated 17 January 2007;

That the amount owed under paragraph 3 above is payable within seven days of the date of the costs being quantified by agreement, or, in the absence of agreement, the completion of any costs assessment process;

That, if the amount owed under paragraph 3 is not paid within the time provided under paragraph 6, then the solicitor for GSI, presently Stephen Michael Jauncey, acting on behalf of GSI, would be entitled to make a demand for payment of the relevant amount under the Bankers Undertaking dated 13 December 2006 on the basis that the amount is regarded as an amount "liable to be paid pursuant to the Orders of the Trial Judge or subsequent order of the Court in the Appeal Proceedings" for the purposes of the deed dated 17 January 2007;

That the costs of the Appeal be at the discretion of the Full Bench, or by agreement between the parties;

That any costs owed under paragraph 8 be payable within seven days of the date of the costs being quantified by agreement, or, in the absence of agreement, the completion of any costs assessment process;

That, to the extent that the appellants are required to pay any costs to GSI or Mr Krauss in respect of the Appeal proceedings, and the relevant amount is not paid within the time provided under paragraph 9, then the solicitor for GSI and Mr Krauss, presently Stephen Michael Jauncey, acting on behalf of GSI or Mr Krauss, would be entitled to make a demand for payment of the relevant amount under the Banker Undertaking dated 1 March 2007 on the basis that the amount is regarded as an amount "that Cosmetic Suppliers is liable to pay pursuant to any order for costs in favour of GSI and Mr Krauss in the Appeal Proceedings". This offer is open for acceptance until 5:00pm on Friday, 11 May 2007 . Costs of the Appeal With respect to the costs of the Appeal (including in respect of security for costs application), we note the following options:

A. Mr Krauss and GSI will consent to the question of the costs of the appeal being resolved by your clients agreeing to pay to our clients the sum of $40,000 in respect of our clients' costs incurred in connection with hte Appeal;

B. In the alternative to A, Mr Krauss and GSI will consent to the question of the costs of the appeal being resolved by your client agreeing to pay our clients costs of the Appeal on a party/party basis in an amount as agreed or assessed; or

C. In the event that neither A nor B are acceptable to your clients, the parties will leave the question of the costs of the Appeal to be determined by the Full Bench. For the avoidance of doubt, we note that the settlement offer set out in this letter is open for acceptance regardless of which of options A to C your clients choose in respect of the costs of the Appeal. However, in the interest of certainty , any acceptance of this offer must include an election in relation to the treatment of costs of the Appeal in accordance with one of the options set out at A to C above. Calderbank offer

We put you on notice that should this offer not be accepted not be accepted, our clients will rely on this letter on the question of the costs of the Appeal in accordance with the principles enunciated in Calderbank v Calderbank 1976 Fam 93. 11 The respondents have already been awarded their costs incurred in relation to the first instance proceedings. The offer of compromise made under the IRC Rules by the respondents in relation to the costs at first instance was rejected by the appellants. The offer met the requirements under the Rules, namely, the judgment orders to which the offer related were "no less favourable" than the terms of the offer. Staff J found that the rejection of the offer of compromise dated 10 March 2005 by the appellants was not reasonable. It remains in the present application to consider whether the respondents should have the benefit of their costs of the appeal in the terms proposed in the offer of 26 April 2007. 12 There does not appear to be any dispute that the offer was a genuine offer of compromise. The appellants have not raised any suggestion to the contrary in their submissions. The offer was couched in terms of a Calderbank type offer. The offer was also expressed to be open until 5pm on Friday 11 May 2007 which afforded the appellants a period in excess of two weeks to consider the offer. There does not appear to be any issue that the period of time in which the offer was expressed to be open was reasonable. In the circumstances the period of two weeks appears to us an adequate period of time, giving the appellants the opportunity and sufficient time in which to respond. 13 The respondents rely on the failure of the appellants to respond to the offer within the allotted time, or at any time. While the appellants concede that they did not respond in writing, they submit that, "... there were oral communications between solicitors in relation to that matter". No further details have been provided by the appellants as to the substance, extent of, or time during which these oral communications were made. The Full Bench's discretion as to costs is very wide and when considering whether the appellants' rejection of the offer was reasonable, a relevant matter, in our view, is whether the appellants responded in any formal way to the offer or, if not, whether there is a reasonable explanation for their failure to respond. Oral communications between solicitors without disclosure of the content, or time during which the communications occurred, suggests in our view, that the appellants did not give adequate consideration to the offer. This factor counts against the appellants when weighing up the factors relevant to the exercise of the discretion to award costs. 14 The appellants submit that their rejection of the offer was reasonable. First it is contended that the offer left open the question of costs in the appeal. Nothing further has been advanced by the appellants in support of this. In any event we do not agree. The letter of 26 April 2007 sets out in detail the terms of the offer. Under the sub-heading "Costs of the Appeal" three options are set out for consideration. The first of these is that the respondents would in effect accept the sum of $40,000 in full settlement of the costs of the appeal. This is not a situation where an offer is made inclusive of costs but the Full Bench is not able to determine an amount attributable to the substantive claim for the costs incurred in advancing it: cf Bowman v Ricegrowers Limited (formerly Ricegrowers' Co-operative Limited) (No 2) [2007] NSWIRComm 267 at [32] - [35]. 15 Secondly the appellants contend that their refusal was reasonable because the offer included terms which would entitle the respondents to rely upon a banker's undertaking which apparently had been given after the stay of the orders of Staff J were lifted. According to the appellants the matter of the banker's undertaking was one in relation to which the respondents had no entitlement on the appeal, and one which the respondents would not have been capable of including as a term of the offer. This may be so, but it is difficult to see what relevant impact the inclusion of the details concerning the banker's undertaking in the offer, and the effect of the subsequent lifting of the stay granted at first instance could have in considering whether the appellants' refusal of the offer was reasonable. In addition the banker's undertaking was just one of several matters adverted to and relied upon by the respondents in the Calderbank offer. 16 Thirdly, the appellants rely on the finding of the Full Bench that Staff J fell into error in relation to the approach his Honour took to the issue of mitigation. Finally the appellants contend that while the Full Bench did not find error in relation to the other grounds of appeal, that nevertheless the grounds were arguable. 17 In relation to the issue of mitigation the Full Bench in the judgment on the appeal found that although the principle of mitigation should have been applied by Staff J, the application of the principle revealed that the net earnings of the respondents following the termination of the sales agency agreement were relatively insubstantial such that the amount may be disregarded for the purposes of s 106(5): Cosmetic Suppliers Pty Ltd & Anor v Great Scott International Pty Ltd & Anor at [64] - [66]. In our view, given the negligible amount of earnings to be taken into account, it would have been reasonable for the appellants to have anticipated the distinct possibility that the amount payable by compensation would not be reduced for mitigation: Bowman v Ricegrowers Limited at [27]. 18 The fact that the other grounds of appeal were arguable we do not find sufficiently persuasive. Ultimately the appellants were not successful on any of the grounds of appeal advanced. 19 In our view the weight of the various factors relied upon is in favour of granting the respondents' application. These include the failure of the appellants to formally respond to the offer without any adequate explanation, as well as their failure to establish any of the matters relied upon in support of the submission that the rejection of the offer was reasonable.

Orders 20 The Court accordingly makes orders in terms of Order 1 of the respondents' Notice of Motion filed 14 November 2007, as follows:

1. That the costs ordered pursuant to order 3 made by the Full Bench on 16 October 2007 be paid on the following basis: (a) the Appellants to jointly or severally pay the Respondents' costs on a party/party basis from 1 December 2006 to 26 April 2007, as agreed or as assessed; and

(b) the Appellants to jointly or severally pay the Respondents' costs on an indemnity basis from 27 April 2007 onwards, as agreed or as assessed. __________________________

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