Favotto Family Restaurants Pty Ltd v Chief Commissioner of State Revenue

Supreme Court of NSW|2020-05-08|Before: Ward CJ

Judgment

HER HONOUR: On 26 February 2020, I published reasons for judgment in this matter (see Favotto Family Restaurants Pty Ltd v Chief Commissioner of State Revenue [2020] NSWSC 120, to which I will refer as the Principal Judgment), on a review pursuant to s 97 of the Taxation Administration Act 1997 (NSW) (the Taxation Administration Act) of two assessments for duty that had been issued by the defendant, the Chief Commissioner of State Revenue (NSW) (the Chief Commissioner), on 10 December 2015 (the Assessments). The Assessments related to transactions entered into by the plaintiff, Favotto Family Restaurants Pty Ltd (Favotto), in respect of two McDonald's restaurant businesses, one at Menai and one at Lakemba. For the reasons set out in the Principal Judgment, I revoked in full each of the Assessments and ordered the Chief Commissioner to pay Favotto's costs of the proceeding.
By notice of motion filed on 6 March 2020, Favotto seeks a variation of that costs order. It seeks costs on the indemnity basis from 5 December 2017, as against the Chief Commissioner, relying on the principles articulated in Calderbank v Calderbank [1975] 3 All ER 333 (Calderbank). This is sought on the basis that Favotto achieved a result better in the proceeding than an offer put by Favotto to the Chief Commissioner on 5 December 2017, which offer the Chief Commissioner did not accept. The Chief Commissioner resists such an order.

Background

The background to the substantive dispute is set out in the Principal Judgment and, to a large extent need, not here be repeated. It is, however, relevant briefly to revisit some of the chronology of events in order to set in context the timing of the making of the settlement offer on which Favotto here relies.

Issue of Assessments and raising/determination of Objections thereto

The Assessments were (as noted above) issued on 10 December 2015 with the duty assessed amounting to $479,468 in total (including interest).
On 19 February 2016, Favotto lodged objections to the Assessments (the Objections). By letters dated 2 December 2016 and 16 December 2016, the Chief Commissioner disallowed the Objections (the Objection Decisions).
Favotto then commenced the present proceeding by summons filed on or about 24 January 2017. Favotto filed and served its Appeal Statement on about 13 March 2017 and the Chief Commissioner filed and served his Appeal Statement on or about 12 April 2017.
As at 5 December 2017 (the date on which the relevant offer was made), the total unpaid duty and interest in respect of the Assessments was $562,505.

The offer to the Chief Commissioner

By letter dated 5 December 2017, Favotto sent a letter headed "Without Prejudice Save as to Costs" to the Chief Commissioner. The letter contained an offer (the Offer) to settle the matter for $40,000 with no order as to costs.
The Offer was stated to remain open for acceptance for a period of 14 days (until 12 noon on 19 December 2017).
The letter included the statement that the Offer "was made in accordance with the principles set out in Calderbank v Calderbank [1975] 3 All ER 333 and Messiter v Hutchinson (1987) [sic] NSWLR 525". I note that it did not purport to be an offer of compromise in accordance with the procedures set out in the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) for the making of formal offers of compromise.
On 6 December 2017, the Chief Commissioner acknowledged by email the receipt of the letter containing the Offer and sought a timetable for the then forthcoming directions hearing on 8 December 2017.
The Chief Commissioner notes that, at the directions hearing on 8 December 2017, there was discussion as to the making of a request by the Chief Commissioner for information from Favotto (prior to Favotto serving its evidence) as to the "franchise rights intangible" (a phrase referred to but not defined in the relevant sale agreements), to which see the discussion of this issue in the Principal Judgment) and for Favotto to provide such information with the Chief Commissioner to seek leave to amend his Appeal Statement, if necessary, before the filing of Favotto's evidence.
As had been foreshadowed, the Chief Commissioner, on 18 December 2017, wrote to Favotto requesting information regarding the "franchise rights intangible".
The Offer expired (in accordance with its terms), not having been accepted by then, on 19 December 2017 (relevantly, without the provision of the information that had been requested as to the "franchise rights intangibles").
On 20 December 2017, Favotto wrote to the Chief Commissioner in response to his letter dated 18 December 2017. The Chief Commissioner says that this response did not provide the information the Chief Commissioner had requested regarding the "franchise rights intangible"; and that, on 21 December 2017, the Chief Commissioner by email repeated his request for information regarding the "franchise rights intangible".
On 16 January 2018, Favotto wrote to the Chief Commissioner providing some information regarding the "franchise rights intangible" and stating that it would be adducing evidence in relation to the "franchise rights intangible".
On or after 22 February 2018, Favotto filed and served its evidence. The Chief Commissioner says that none of this evidence "appeared to inform the meaning or nature of the 'franchise rights intangible'".
The hearing of this matter took place on 1 October 2019 and 2 October 2019.
On 26 February 2020, the Principal Judgment was handed down.

Relevant principles

The relevant principles relating to the exercise of the costs discretion under s 98 of the Civil Procedure Act 2005 (NSW) (Civil Procedure Act) are well-known and were not here in dispute.
The discretion is, of course, to be exercised judicially and with regard to the overriding statutory mandate in respect of the conduct of litigation in this Court (see s 56 of the Civil Procedure Act) for the just, quick and cheap resolution of the real issues in dispute. The underlying principle in the making of any costs order is that of fairness (see Commonwealth of Australia v Gretton [2008] NSWCA 117 at [121] per Hodgson JA, Mason P agreeing at [1] and Beazley JA, as Her Excellency then was, agreeing at [85]).
Pursuant to rules 42.1 and 42.2 of the UCPR, the general rule is that costs follow the event and, unless the court orders otherwise or the rules otherwise provide, costs are to be assessed on the ordinary basis. Hence, the Chief Commissioner does not dispute that Favotto is entitled to the usual order as to costs as a result of its success in the principal proceeding.
However, under the UCPR, there is provision for special costs orders (in accordance with the offer of compromise procedure). It is not suggested that those provisions are here directly applicable. However, the making of an informal offer of settlement (commonly referred to as a 'Calderbank offer') may warrant an indemnity costs order in certain circumstances. So, for example, Favotto has pointed to Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 (Miwa) as illustrative of the willingness of Courts to act upon informal offers of settlement (see at [8] per Basten JA, with whom McColl JA at [1] and Campbell JA at [26] agreed).
In this regard, reference is commonly made to the rationale underlying the making of special (indemnity costs) orders. In Miwa (at [6]-[7]), Basten JA made reference to Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721, where (at 724) the objects of settlement offers were identified as threefold: 1. To encourage the saving of private costs and the avoidance of the inherent risks, delays and uncertainties of litigation by promoting early offers of compromise by defendants which amount to a realistic assessment of the plaintiff's real claim which can be placed before its opponent without risk that its 'bottom line' will be revealed to the court; 2. To save the public costs which are necessarily incurred in litigation which events demonstrate to have been unnecessary, having regard to an earlier (and, as found, reasonable) offer of compromise made by a plaintiff to a defendant; and 3. To indemnify the plaintiff who has made the offer of compromise, later found to have been reasonable, against the costs thereafter incurred. This is deemed appropriate because, from the time of the rejection or deemed rejection of the compromise offer, notionally the real cause and occasion of the litigation is the attitude adopted by the defendant which has rejected the compromise. In such circumstances, that party should ordinarily bear the costs of litigation.
I note also what was said by Hayne JA, then of the Court of Appeal of the Supreme Court of Victoria, in Grbavac v Hart [1997] 1 VR 154 at 165; [1996] VSC 37 in the context of Calderbank offers.
In Rinehart v Rinehart (No 2) [2020] NSWSC 235, I recently had cause (at [141]) again to note the public policy considerations in relation to the making of Calderbank offers, noting that: 141. In Commonwealth of Australia v Gretton [2008] NSWCA 117, Beazley JA, as Her Excellency then was, noted the public policy considerations that underpin the making of favourable costs orders where a Calderbank offer has been made (see at [41], quoting from Leichhardt Municipal Council v Green [2004] NSWCA 341 at [14] per Santow JA), those being the encouragement of settlement of disputes as soon as possible and the discouragement of wasteful and unreasonable behaviour by litigants…
In this regard, I note also the observation by Goldberg J in Dr Martens Australia Pty Ltd v Figgins Holdings Pty Ltd (No 2) [2000] FCA 602 (at [22]), to which Favotto has referred, namely that the purpose of a Calderbank offer is to offer to bring litigation to an end.
Relevantly, it should be noted that while the rejection of a Calderbank offer, in circumstances (where it transpires that the final result in the proceeding is less favourable to the offeree) enlivens the discretion to award indemnity costs, it does not create a prima facie right to such an order (see Chief Commissioner of State Revenue v Platinum Investments Management Ltd (No 2) [2011] NSWCA 192 at [9]). Rather, in order to warrant the making of a special (indemnity) costs order, it is clear that the offer must "constitutes a genuine offer of compromise, which it was unreasonable for the [unsuccessful party] not to accept" (Herning v GWS Machinery Pty Ltd (No 2) [2005] NSWCA 375 at [4] per Handley, Basten and Beazley JJA, as Her Excellency then was; see also Anderson Group Pty Ltd v Tynan Motors Pty Ltd (No 2) (2006) 67 NSWLR 706; [2006] NSWCA 120 at [8] per Santow and Basten JJA and Young CJ in Eq; Leichhardt Municipal Council v Green [2004] NSWCA 341 (Leichhardt Municipal Council) at [23] per Santow JA with whom Bryson JA and Stein AJA agreed). Further; where the offer is a Calderbank offer, the onus to demonstrate that it was unreasonable to reject it is on the party seeking to rely on the making of the offer (see Evans Shire Council v Richardson (No 2) [2006] NSWCA 61 at [26]). Here, that party is Favotto.
The factors to which a Court will have regard when considering whether the rejection or non-acceptance of the offer was unreasonable include: the stage of the proceeding at which the offer was received; the time allowed to the offeree to consider the offer; the extent of the compromise offered; the offeree's prospects of success assessed as at the date of the offer; the clarity with which the terms of the offer were expressed; and whether the offer foreshadowed an application for indemnity costs in the event of the offeree's rejecting it (see Commissioner of State Revenue v Challenger Listed Investments Ltd (No 2) [2011] VSCA 398 at [8]; Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435; [2005] VSCA 298 (Hazeldene's Chicken Farm) at [25]; Miwa at [12]).
As adverted to above, for a Calderbank offer to be taken into account, it must be a genuine offer of compromise and not merely constitute, in effect, a demand to capitulate (see Truenergy Pty Ltd v Dispute Resolution Panel (No 2) [2009] VSC 612 at [14] per Cavanough J, quoting Berrigan Shire Council v Ballerini (No 2) [2006] VSCA 65 at [17]) or a trigger for costs sanctions (see Leichhardt Municipal Council at [36], [39]).

Favotto's submissions

In the present case, Favotto submits that the key question is whether, in all the circumstances, it was unreasonable for the Chief Commissioner not to accept the Offer (citing Donnelly v Edelsten (1994) 49 FCR 384; 121 ALR 333, where it was said that unreasonable rejection of such an offer provides strong grounds for the making of an indemnity costs order). It is noted that there is a degree of flexibility in assessing Calderbank offers and that such offers may be inclusive of costs (unlike, as was at least formerly the case, with a formal offer of compromise under the UCPR) (citing Elite Protective Personnel Pty Ltd v Salmon [2007] NSWCA 322; Monie v Commonwealth of Australia (No 2) [2008] NSWCA 15). It is further noted that in Cat Media Pty Ltd v Allianz Australia Insurance Ltd [2006] NSWSC 790, Bergin J (as her Honour then was) observed (at [9]) that there is no rule that an "optimistic" offer is not a genuine offer; and that whether or not it was reasonable to reject an offer is a relevant consideration but will not affect the genuineness of the offer.
Favotto points out that it is relevant, when determining whether it was unreasonable for the offeree (here, the Chief Commissioner) to reject an offer, that the offeree has been properly represented (citing what was said by Harrison AsJ at [25] in Roude v Helwani (No 2) [2020] NSWSC 302).
Turning to the question whether there was a genuine offer of compromise in the present case, and referring to the observations of Basten JA in Miwa (at [9]), Favotto submits, first, that the Offer does contain a genuine offer of compromise, noting that the Offer provided for Favotto to pay the Chief Commissioner the sum of $40,000 (and for each side to bear its own costs). Favotto says that the amount of $40,000 is a genuine offer, noting that the Assessments (not including interest charges) came to a total of $419,697.
Insofar as the Chief Commissioner has pointed to evidence (see the affidavit of Mr Philip Thomas Robinson sworn on 1 April 2020 at [4]-[9]) as to his costs as at the time of the Offer (i.e., that the sum of $40,000 only just exceeded the costs to date of $38,806.30) (to which, see below), Favotto says that an assessment of an offer (from an offeror) as compared to costs incurred (by an offeree) is not relevant and, in particular, is not a consideration in the context of whether an offer is genuine. Rather, Favotto contends that the question is whether there is a "genuine offer" as compared to the primary liability. Pausing here, the Chief Commissioner does not suggest that the Offer in the present case was not a genuine offer of compromise, albeit an informed offer of compromise.
As to whether there has been an unreasonable refusal by the offeree (and noting the factors identified in Miwa (at [12]) and Hazeldene's Chicken Farm), Favotto says the following.
First, as to the timing of the offer, that the Chief Commissioner was fully aware at the relevant time of the arguments that would be put by Favotto, as well as the evidence (being the relevant documents - the "Favotto Exhibit"), at the relevant time. Pausing here, the Chief Commissioner cavils with this insofar as the Chief Commissioner says it was unclear at the time what was meant by "franchise rights intangible" (to which, see below).
Favotto notes that the proceeding was commenced on 24 January 2017 and the Favotto Exhibit was available at that time, which contained all the relevant transaction documents. Favotto also refers to the "Model Litigant Policy for Civil Litigation" dated 1 July 2016 and says that the Chief Commissioner was obliged, inter alia, to endeavour "… to avoid litigation, wherever possible" and to have regard to the overriding purpose mandated in the Civil Procedure Act to facilitate the just, quick and cheap resolution of the real issues in civil proceedings.
Favotto says that it had always put in issue that there was no "transfer" of dutiable property (and, in particular, goodwill) and that it, as franchisee, did not acquire "goodwill". It notes that these arguments were explained in each of the Objections. It is noted that, in the Objection Decisions, reference was made to Favotto's submissions that: there was no agreement to sell or transfer goodwill; there was no transfer of goodwill; goodwill in a McDonald's franchise flows from McDonald's intellectual property, including its trade name and trademarks and the McDonalds System owned by the franchisor and that the New Franchisee did not acquire any McDonald's goodwill; there was no other goodwill associated with the Lakemba franchise that the New Franchisee could have acquired since all of it belonged to McDonalds; and McDonald's Australia merely licensed the New Franchisee to use McDonald's goodwill as a franchisee under its licence agreement with the New Franchisee and that this did not amount to a transfer of goodwill.
It is submitted by Favotto that the Chief Commissioner therefore had the benefit of Favotto's arguments prior to the commencement of the proceedings (because of the assessment, objection and objection decision process contained in the Taxation Administration Act).
Favotto submits that the two issues on which it was ultimately wholly successful (being, the issues as to there being no relevant "transfer" of dutiable property and Favotto not relevantly having acquired "goodwill") were "always fully put" in the Offer (and were grounds put in the summons filed by it) and were identified prior to the commencement of the proceeding. It is said that those were the real issues, the just, quick and cheap resolution of which the parties were required to facilitate pursuant to s 56 of the Civil Procedure Act (again noting the obligation of the Chief Commissioner as a model litigant pursuant to [3.2(d)] of the "Model Litigant Policy for Civil Litigation" of 29 June 2016 (date as per Favotto's submissions).
Favotto points out that it drew to the attention of the Chief Commissioner the two authorities on which Favotto was relying. Those decisions being, first. that of the Full Court of the Federal Court of Australia (Lockhart, Wilcox and Gummow JJ) in Ranoa Pty Ltd v BP Oil Distribution Ltd (1989) 91 ALR 251 (Ranoa), for the proposition that a franchisee does not acquire "goodwill" (see at [1.6] and [1.7] of the Offer) and, second, that of the Victorian Court of Appeal decision in Coles Myer Limited v Chief Commissioner of State Revenue (Vic) 98 ATC 4,537 (Coles Myer) (see at [1.8] of the Offer).
It is said that there is no evidence that those authorities were considered by the Chief Commissioner. I note, to this, that the Chief Commissioner, in effect, submits his consideration of these authorities can be inferred from the content of the Objective Decision.
Particularly, Favotto submits that the second of those decisions was exactly on point. It is further submitted by Favotto that, given that success on the "transfer" point alone would be determinative of the proceeding, the question whether there was a "transfer" was a critical fact in issue. It is submitted that the Chief Commissioner should have "engaged" on this issue (and Favotto raises this as another argument as to why the rejection of the Offer was unreasonable).
As to the factors to be considered, Favotto says as follows.
First and as adverted to above, with respect to the timing of the Offer, that the Offer was put by Favotto at a time that the Chief Commissioner had full knowledge of all of the relevant transaction documents and also knowledge of the arguments on which Favotto was relying; and thus, the Chief Commissioner had for some time been aware of the basis of Favotto's arguments (on which, it is noted, Favotto was ultimately successful).
Second, as to the time allowed to the offeree to consider the offer, it is noted that the Offer was sent by email on 10.32 am on 5 December 2017; that it remained open until 12 noon on 19 December 2017; and that there is no evidence that the Chief Commissioner sought to extend the period in which the Offer remained open for acceptance. In that regard, it is noted that the solicitors for the Chief Commissioner, in the context of seeking a timetable at the 8 December 2017 directions hearing, did by email of 12.16pm on 6 December 2017 (after expiry of the Offer) state that the "… parties can continue settlement discussions in the meantime".
It is submitted by Favotto that, given that the arguments (on which Favotto was ultimately successful) had consistently been maintained by Favotto, including prior to litigation, the Chief Commissioner had "more than ample time to consider (and accept) the Offer".
Third, as to the extent of the compromise offered, it is noted that the primary duty liability (along with interest, when initially assessed) was $479,468.45, with the primary duty liability (not including interest) being $419,697.50 and that the amount of the offer was $40,000, thus being approximately 10% of the primary duty liability (and around 7% of the total sum when interest is included).
It is submitted that, given the nature of the proceeding, the matter was in the nature of "all-or-nothing" litigation (i.e., "the arrangements were either dutiable, or they were not"). In those circumstances, it is submitted that the Offer was a genuine (and "generous") offer that was put by Favotto to the Chief Commissioner.
Fourth, as to the offeree's prospects of success assessed as at the date of the Offer and not with the benefit of the ultimate decision, Favotto submits that its (the offeror's) prospects of success were "extremely strong" and says that it could reasonably assess that it had a 90% chance of success (such that an offer of $40,000, being approximately 10% of the primary duty liability, was justified). It is noted that the Chief Commissioner did not respond in a manner that challenged the amount of the offer, either based on the offeree's confidence in its prospects of success or at all. It is further submitted that it can, from this, be inferred that the Chief Commissioner had doubts about its prospects of success at the time, insofar as the Chief Commissioner's response to the Offer referred to the parties "continu[ing] settlement discussions". I interpolate to note that I would not infer, from a willingness to entertain or to continue settlement discussions, the existence of doubts as to the Chief Commissioner's prospects of success. A party with a firm belief in the merits of its own position may still in good faith be willing to entertain settlement discussions (and, indeed, a model litigant would no doubt be obliged to keep in mind, and to pursue, the possibility of achieving a commercial settlement in order to avoid ongoing costs of litigation). Thus, I do not accept that the Chief Commissioner's response assists Favotto in this regard.
Fifth, as to the clarity with which the terms of the Offer were expressed, Favotto says that the Offer was expressed in a clear and "fulsome manner"; again pointing to the fact that the Chief Commissioner had the benefit of both the relevant transaction documents and Favotto's arguments for some time prior to the Offer.
Sixth, as to whether the offer foreshadowed an application for indemnity costs in the event of the offeree rejecting it, Favotto points out that the Offer expressly stated that it was based on the principles in Calderbank and that it specifically foreshadowed an application for indemnity costs in the event that the Offer was rejected by reference to the statement (at [4.5] of the Offer) that: Consequently, if our client achieves a result at the hearing of the Proceedings in their favour, or an outcome above the offer made in this letter, then our client intends to rely on this offer in support of an application for your clients to pay our clients' costs on an indemnity basis from the date of this offer.
Insofar as the Chief Commissioner's solicitor, Mr Robinson, has deposed to the costs of the Chief Commissioner up to the time of the Offer (i.e., 5 December 2017) (to which, see below), it is said again that this is not a relevant consideration in determining whether the rejection of the Offer was unreasonable. Favotto says that the purpose of a Calderbank offer is to deal with the costs of the proceedings if the case is not settled and not with the costs of a party prior to the Calderbank offer being made (noting that it may lead to an order for the payment of costs on an indemnity basis, if unreasonably rejected). Thus, Favotto says that the question is whether the rejection of the Offer was unreasonable (not whether the Offer satisfies the offeree's costs at the time of the Offer). Favotto emphasises here the policy considerations which underlie the rule articulated by the Court of Appeal in Calderbank (being, the importance of the encouragement of the settlement of disputes) and again submits that the Chief Commissioner had notice of Favotto 's arguments, and the relevant documentation, prior to the commencement of the proceedings.
Finally, Favotto submits that the position of the Chief Commissioner as a taxing authority does not derogate from the Chief Commissioner's obligations and duties as a litigant, invoking the decision of the Full Court of the Federal Court of Australia (Dowsett, Edmonds and Gordon JJ) in Federal Commissioner of Taxation v Clark (No 2) (2011) 197 FCR 251; [2011] FCAFC 140 (a decision which considered the ability of a taxpayer to obtain a costs order, including an indemnity costs order, as against the Commissioner of Taxation) as standing for the proposition that considerations such as the Chief Commissioner's duties with respect to the administration of taxation legislation, any internal practices and procedures and the necessity to litigate in circumstances that involve a matter of public importance do not protect the Chief Commissioner against adverse costs orders. It is submitted that the Chief Commissioner, as a party to litigation, is subject to the legislation and rules of the Court that relate to practice and procedure in the same way as that of any other litigant.
To that end, reliance is again placed on [3.1] of the "Model Litigant Policy for Civil Litigation" (to which I have referred above) which provides that the "obligation to act as a model litigant requires more than merely acting honestly and in accordance with the law and court rules". Favotto says that the Calderbank principles apply equally to the Chief Commissioner and that any argument that the litigation had a public benefit is diminished, given that subjecting duty to transfers of dutiable property such as "goodwill" ceased to apply from 1 July 2016 (referring to s 35 of the Duties Act 1997 (NSW) and [95] of the Principal Judgment).

Chief Commissioner's submissions

The Chief Commissioner resists an order for indemnity costs.
As to the factors identified in Hazeldene's Chicken Farm to be taken into account in relation to the Offer in this case, the Chief Commissioner accepts that the offer allowed sufficient time for its acceptance, was expressed with sufficient clarity and foreshadowed an application for indemnity costs in the event that it was rejected. However, the Chief Commissioner takes issue with the following.
As to the stage at which the Offer was made, it is noted that the Offer was made and expired before Favotto had put on its evidence. It is said that, as a consequence, the Chief Commissioner did not have any evidence to explain: the nature of the asset called "franchise rights intangible" (to which a large part of the purchase price was allocated); or what appeared to the Chief Commissioner to be a contradiction between the way that Favotto was treating the restaurant transactions for stamp duty purposes compared to goods and services tax (where an exemption applicable to the sale of a going concern was being claimed).
The Chief Commissioner says that, without explanation of the nature of the asset called "franchise rights intangible", the Chief Commissioner could not make an informed evaluation of the strength of Favotto's case. It is submitted that the importance of this issue to the Chief Commissioner's consideration of his prospects is shown by the terms of the Objection Decisions and the fact that the Commissioner sought from Favotto information about the "franchise rights intangible" by letter dated 18 December 2017, before expiry of the Offer, to which no response was provided until 16 January 2018.
The Chief Commissioner says that the importance of the "franchise rights intangible" is that the vendor and purchaser had entered into a separate agreement for the grant, for valuable consideration, of the right to use the "McDonald's System" (i.e., the grant of the franchise). It is noted that the Chief Commissioner had made plain in the Objection Decisions why he regarded the lack of any explanation in the sale agreement of the meaning of the undefined term "franchise rights intangible" as important and that Favotto chose not to deal with this either in the Offer itself or subsequently (following the request to do so) before expiry of the Offer.
Further, in response to the contention by Favotto (see at [5.4], [5.5] and [5.12] of its written submissions dated 21 April 2020) that the Chief Commissioner was fully informed as to Favotto's arguments and had all of the relevant transaction documents to assess those arguments, the Chief Commissioner says that, to the contrary, that evidence referred to restaurant businesses being "transferred" (including the grant of a new Licence effecting a "transfer" of the business), referring by way of example to evidence that was before me in the principal hearing that the Chief Commissioner contends contradicted Favotto's arguments and supported the Chief Commissioner's case.
Insofar as Favotto submits (see at [5.10] and [5.11] of its submissions) that it was unreasonable for the Chief Commissioner to reject the Offer because it drew his attention to the two decisions relied on by Favotto and referred to in its submissions (Ranoa and Coles Myer), the Chief Commissioner says the following.
First, that those two cases were put forward in the Offer in support of an argument that "a franchisee does not acquire goodwill when entering into a franchise agreement" (see at [1.4] of the Offer); whereas the Chief Commissioner maintains that the transactions in the present case cannot be correctly characterised as simply "entering into a franchise agreement"; and, rather, it is said that they were the transfer of two successful existing businesses together with the grant of a new franchise agreement to the purchaser of each business. It is submitted that the reasonableness of the Chief Commissioner's consideration of Ranoa and Coles Myer needs to be considered in light of the actual transactions which he had assessed for duty.
Second, that Ranoa was concerned with the right of a franchisee to claim, as against the franchisor, payment of compensation for the goodwill of a franchised business on termination of the franchise agreement; whereas the present case involved the sale of an existing franchised business to the taxpayer together with the grant of a new franchise agreement.
Third, that Coles Myer was concerned with the meaning of "transfer" in a different statutory context (being share transfer duty). It is said that, while the decision addresses the meaning of the word "transfer", it does not directly address the principle which the Chief Commissioner considered was established by the authorities on which he relied (being that when an existing business is transferred, the goodwill of the business is transferred to the purchaser without the need for an express agreement to do so). Relevantly, those authorities including Commissioner of Taxation (Commonwealth) v Murry (1998) 193 CLR 605; [1998] HCA 42 and Sturt Football Club Inc v Commissioner of State Taxation (SA) [2010] SASC 279 being decisions which, it is noted, were discussed at length in the Objection Decisions and not addressed in any substantive way in the Offer.
Fourth, that the Offer did not engage with the Commissioner's argument. In this regard, it is said that, while the Commissioner's argument was ultimately unsuccessful, it was not foreclosed by either Ranoa or Coles Myer.
As to the extent of the amount comprised by the Offer, it is said that, while the Offer was not trivial, it was relatively small ($40,000) compared to the total duty and interest outstanding as at 5 December 2017 which was $562,505 (therefore, representing only about 7%) and would have only just covered the Chief Commissioner's costs to the date of the Offer.
It is noted that the fact that the amount of the Offer is relatively small in comparison to the amount of the claim is a factor supporting the conclusion that the failure to accept the offer was not unreasonable.
Further, it is noted that the duty and interest remained outstanding until the judgment was given revoking the Assessments and that Favotto's statutory obligation to pay the duty and interest was unaffected by the commencement of the proceedings (see s 94 of the Taxation Administration Act).
Finally, the Chief Commissioner says that the proceeding raised an important legal issue (i.e., whether the sale of an existing business operated under a franchise arrangement, coupled with the grant to the purchaser of a licence to use the franchised intellectual property, could involve a transfer of goodwill associated with the existing business which was sold). It is said that there was, at the time of the Offer, no clear judicial authority which resolved this issue and that the Chief Commissioner had set out in the Objection Decisions a reasoned basis for the view that stamp duty was payable.
Following, the Chief Commissioner submits that, given that the restaurant transactions concerned a well-known and successful franchise operation, the outcome of the proceeding was likely to have repercussions also for other similar transactions that occurred before 1 July 2016 (contra [7.6] of Favotto's submissions).
The Chief Commissioner points to the Objection Decisions from which it is submitted that it is clear that he reasonably believed the Assessments to be correct and that they ought to be defended in the discharge of his statutory duty to administer the Duties Act and Taxation Administration Act. While the Chief Commissioner accepts that the statutory duty to administer the taxation laws does not "protect" him from adverse costs orders (cf Favotto's submissions at [7.3]), the Chief Commissioner says that the existence of that statutory duty is a factor which he must take into account when deciding whether to accept a settlement offer in litigation which only just covers his legal costs; and that, for the same reason, it is a matter which is relevant to an assessment of the reasonableness of his decision not to accept an offer.
It is submitted that, while prospects of success are a relevant consideration, the fact that the Chief Commissioner may have substantial obstacles to success would not make his non-acceptance of the offer to settle unreasonable (assuming his case was neither hopeless nor conducted in bad faith, citing Commissioner of State Revenue v Challenger Listed Investments (No 2) [2011] VSCA 398 at [18]-[21]). It is submitted that given that both restaurant transactions were evidenced by agreements which provided, in terms, for the sale of successful existing businesses and the Chief Commissioner's case relied on High Court authority (including, Murry) as applicable to the terms of the transaction documents, the Chief Commissioner's case was reasonably arguable and was neither hopeless nor conducted in bad faith.
In light of the above matters (in particular, the stage at which the Offer was made and the Chief Commissioner's prospects of success at that time), it is submitted that Favotto has not discharged its onus of establishing that it was unreasonable for the Chief Commissioner not to accept the Offer.

Determination

I have already made reference to the applicable legal principles where there is an application for indemnity costs based on a rejection or non-acceptance of a Calderbank offer.
As noted, the Chief Commissioner accepts that the second, fifth or sixth of the matters referred to above (time for acceptance, clarity of its terms and the intention to rely upon it in relation to costs) are not in issue in the matter now before me. That is, the Chief Commissioner accepts that the Offer allowed sufficient time for acceptance, was expressed with sufficient clarity and foreshadowed an application for indemnity costs in the event of its rejection.
As to the other factors, I consider that the time, or stage in the proceeding, at which the offer was made is largely neutral. It cannot be said that it was too early to be properly considered. The respective appeal statements had been served and I am told that there had been settlement discussions in June and October 2017.
As to the amount offered by way of settlement, I do not regard it as desirous, notwithstanding that it represented only around 10% of the primary duty assessed. It certainly did not call for complete capitulation.
Crucially however, the lack of clarity as to the meaning of the term "franchise rights intangible" gave rise to a reasonable basis for the contentions raised by the Chief Commissioner in the proceeding, noting that the Chief Commissioner had sought information on that very topic. The fact that the Chief Commissioner was ultimately unsuccessful does not mean that the claim was always doomed to failure; nor that it was unreasonable for the Chief Commissioner to defend the claim. I certainly did not regard the result as a foregone conclusion. There is no suggestion that the Chief Commissioner conducted the case in bad faith.
Therefore, leaving aside altogether the position of the Chief Commissioner as a taxing authority (including, any issue in relation to this case raising a matter of public interest), I have concluded that it was not unreasonable for the Chief Commissioner not to accept the Offer in all the circumstances. Hence, I have determined that an order for indemnity costs is not warranted.
It follows that Favotto's notice of motion should be dismissed. There is no reason not to make the usual order for costs.
For the above reasons, I make the following order: 1. Dismiss the notice of motion filed on 6 March 2020 with costs.

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Taxation Administration Act 1997(NSW)

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