The First Offer
11 Termicide's solicitor's letter of 14 January 2008 was in the following terms:
Offer of Compromise
1 We enclose by way of service upon the Applicant an Offer of Compromise made under Order 23 of the Federal Court Rules.
2 The essential issue in this case is your client's claim that Termiglass is not an effective termite barrier and does not comply with the relevant Australian Standard. However, the evidence already filed in the case shows that, since Termiglass was introduced in 2004, there have been in excess of 30,000 installations without a single instance of failure. This should be sufficient by itself to establish the effectiveness of Termiglass as a termite barrier.
3 Your client relies upon the testing in 2004 by Drs Ewart and Holt. There are obvious deficiencies with the testing procedures which were adopted and these were highlighted in Mr Franklin's submissions to the Court in our summary judgment application. A simple illustration is that Dr Ewart deposes that he received two bags of samples from Dr French and that he forwarded those samples to Dr Holt. However Dr Holt only received one bag. Furthermore Dr Holt did not sieve the material received to ensure that it fell within the mid-range sized particles which is used to make up the Termiglass barrier in accordance with the CSIRO Appraisal.
4 In short the evidence does not establish that Drs Ewart or Holt tested Termiglass.
5 This is a genuine offer to compromise the litigation. A settlement in these terms will mean that the parties will no longer be required to commit time and resources to the case. Obviously if the case continues then significant costs are likely to be incurred especially by way of additional expert evidence. In this regard you will note that our client is prepared to significantly discount its claim for costs in the proceedings as an inducement to your client to terminate the litigation at this stage.
6 A settlement at this stage will also avoid any embarrassment or adverse publicity to your client. Obviously if the case continues and results (as we expect it will) in a finding that Termiglass is an effective barrier and does comply with the relevant Standard then this is likely to cause significant embarrassment to your client as a major player in the industry.
7 We appreciate that, when these proceedings were commenced, your client acted in the belief that the 2004 testing showed that (in the words of the Statement of Claim) there is sufficient doubt about the effectiveness of Termiglass as a termite barrier. Any such doubt should be resolved by, firstly, the large number of installations which have occurred since 2004 without any report of failure and, secondly, the fact that Termiglass as a system has been recertified by the CSIRO and also independently by LTD Consultants. Lastly, the deficiencies associated with the 2004 testing as discussed above means that the testing is not a proper basis to maintain the view that Termiglass is not an effective termite barrier system.
8 For completeness we should also mention that, although Dr Ewart expresses some reservations about the use of glass as a termite barrier, a brief literature search will show that glass has been extensively used as a termite particle barrier in North America, Europe and Asia (Japan). There is extensive range of literature which has been published to confirm this. This material (which is easily accessible) will confirm the suitability of glass for this type of termite barrier.
9 If you have any queries or comments about the settlement proposal please do not hesitate to contact us.
10 This letter is sent on the basis that it is without prejudice but we reserve the right to place it before the Court on the issue of costs if the enclosed Offer of Compromise is not accepted and our client is subsequently successful in the litigation.
12 The offer enclosed with that letter stated:
The Respondent offers to compromise these proceedings on the following terms:
1 The parties consent to an order that the proceedings be dismissed.
2 The Applicant pay one half of the Respondent's costs of this proceedings [sic], such costs to be agreed or failing agreement, to be assessed or taxed under Order 62.
3 This offer is made pursuant to Order 23 and is in full and final settlement of all claims in these proceedings.
4 This offer will expire on 30 January 2008.
13 As can be seen from a study of its terms, the then O 23 r 11(5), though directed to the subject of an offer of compromise made by a respondent, did not deal with the situation where an applicant's claim fails completely such that the proceeding is subsequently dismissed. As I observed in Olivaylle Pty Ltd v Flottweg GMBH and Co KGAA (No 5) [2009] FCA 571 (Olivaylle No 5) at [8]:
An analogous lacuna in the then rules of the New South Wales Supreme Court moved a judge of that court to observe that the costs rule "discriminates irrationally against wholly successful defendants": Notaras v Hugh [2003] NSWSC 919 at [5] per Sperling J. Various judges made recommendations that rules of practice be amended to remove this discrimination: Dal Pont, supra, at [13.16], fn 79. Order 23 r 11 was amended so as to address this lacuna by Federal Court Amendment Rules 2008 (No 1) (SLI 159 of 2008) which inserted a new sub-rule, sub-rule 11(6) into O 23 r 11.
14 Termicide's submissions in respect of its first offer proceeded upon the basis that the current O 23 r 11(6), the language of which is broad enough to apply in circumstances where an applicant's claim is dismissed, was not applicable to any consideration of whether rejection of the first offer should, in the circumstances, sound in an order for indemnity costs. Granitgard did not submit to the contrary. For reasons which I gave in Olivaylle No 5 at [9] to [11], I agree that the current rule is not applicable to that consideration.
15 The position which thus obtains in respect of a consideration of the first offer is that Termicide does not have the benefit of any indication in the rules as to how, prima facie, the costs discretion should be exercised so far as the basis upon which any taxation of costs should be conducted. Instead, there is in respect of the first offer, no prima facie position. Rather, it is for Termicide to demonstrate why it is that, as a matter of discretion, indemnity costs should be ordered: CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Pty Ltd [2008] FCAFC 173 at [75]. In what has come to be regarded as a leading exposition on the subject Sheppard J in Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 discussed the power to award costs on an indemnity basis and, in a non-exhaustive way, gave examples of circumstances where, in the exercise of the costs discretion, the awarding of costs on that basis may be appropriate. One of the examples given by his Honour (at 233) was an "imprudent refusal of an offer to compromise".
16 Before proceeding further to consider the first offer, it is convenient, because, as in Olivaylle No 5 at [12], I have used the expression "prima facie" to describe the effect of the current O 23 r 11(6), immediately to make some further observations about that sub-rule, even though it is applicable only to the second offer.
17 In other cases other judges have used the expression "presumptive entitlement" to describe the effect of the current O 23 r 11(6). Such cases are helpfully collected by Finkelstein J in Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd (No 4) (Brookfield Multiplex No 4)[2009] FCA 803 at [7]. That is also (at [11]) his Honour's tentative preference as to the construction of the sub-rule, it being unnecessary in that case for him to reach any final conclusion as to its meaning and effect. "Prima facie" and "presumptive entitlement" may be and in my opinion are just different ways of stating the same proposition. So, too, is the expression "rebuttable presumption" which was favoured by Termicide in its submissions concerning the construction of the current O 23 r 11(6).
18 As a matter of language, the current O 23 r 11(6) describes a position which will apply unless the Court otherwise orders. That qualification necessarily implies that there must be a basis arising from the circumstances of a particular case for the Court "otherwise ordering". In turn, because it will be in an applicant's interest so to do, it further implies that an applicant must evidence something in those circumstances which is submitted to provide a basis for "otherwise ordering". If an applicant does this, the Court must make a value judgment, taking into account that evidence, as to how the costs discretion should be exercised. I did not, in the end, understand Granitgard to contend for any different construction of the current rule. However, insofar as Granitgard's submission carried with it, in respect of the current rule, any suggestion that a sufficient basis for "otherwise ordering" was to be found just in demonstrating that it had a reasonable case and had acted reasonably in not accepting the second offer, I reject that submission. To so view the construction of the rule would be inconsistent with the weight of the authorities collected and discussed by Greenwood J in Uniline Australia Ltd v SBriggs Pty Ltd (No 2) (2009) 82 IPR 56 (Uniline) at [45] to [48]. The better view in respect of the current rule is that to "order otherwise", compelling and exceptional circumstances must be shown and that this is not done just by showing that the offeree had a reasonable case and had acted reasonably in rejecting the offer.
19 Granitgard made the submission that the first offer should not be regarded as an offer to compromise at all. A like submission was made in respect of the second offer.
20 In support of this submission Granitgard called in aid and relied upon a line of authority, the effect of which is that, where an offeree rejects an offer of compromise, be that offer one made under rules of court or a "Calderbank" offer, which has, "the appearance more of a procedural move to trigger costs consequences than of a genuine attempt to reach a negotiated settlement": The Uniting Church in Australia Property Trust (NSW) v Takacs (No 2) [2008] NSWCA 172 at [14] per Hodgson JA, McColl JA agreeing, and the offeror secures a more favourable result at trial, that offer does not give rise to any prima facie or presumptive entitlement on the part of the offeror to an indemnity costs order: see also Brookfield Multiplex No 4 at [12] where Finkelstein J collects further such authorities.
21 The offer made in Brookfield Multiplex No 4 was of a kind sometimes described as a "walk away" offer, i.e. an offer that the plaintiffs withdraw the proceeding on terms that each party bear its own costs. One explanation which commended itself to Finkelstein J in that case as to why such an offer may not truly contain an element of compromise was that offered by Giles J in Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358 at 368, "Compromise connotes that a party gives something away. A plaintiff with a strong case, or a plaintiff with a firm belief in the strength of its case, is perfectly entitled to discount its claim by only a dollar, but it does not in any real sense give anything away, and I do not think that it can claim to have placed itself in a more favourable position in relation to costs unless it does so."
22 Even accepting this, there can be no hard and fast rule that a "walk away" offer can never amount to a "genuine" offer of compromise. For, as Finkelstein J further observed in Brookfield Multiplex No 4 (at [13]):
Take for example a case that has progressed for some time and the parties' costs are quite high. In that event an offer to walk away may, in a business sense, be a significant offer: see for example Commissioner of Taxation v Evenfont (No 2) (2009) 223 FLR 28 at [31].
23 InUniline at[38], Greenwood J made a similar point thus:
[38] In the modern world of commercial litigation and various subsets of that litigation such as intellectual property litigation, costs are a very real and quantifiable concern. It would be extremely odd to think otherwise. Costs are incurred in a recoverable inter-parties sense from the moment the proceedings issue and they continue to be incurred at every point along the continuum of the litigation. Litigants who are required to pay these costs in order to assert or resist a claim, regard them as a very real and present expense, if not a real and present danger. Very often these costs are a significant business expense. They invariably require a commitment of significant resources and separate budget allocations. An offer to compromise which is framed in terms of a party's willingness to abandon the recovery of costs so incurred along that continuum through the preparation and analysis of statements, disclosure, analysis of documents and the preparation and review of expert reports, is undoubtedly considered by the litigant as an offer that involves giving up something meaningful, real and measurable. This is particularly so after the completion of case managed preparatory steps at various phases of the litigation which may have the effect of front-end loading significant costs in order to save trial costs. In many cases although not in all cases, the notion that a party is giving up nothing by inviting another party to discontinue a claim on the footing that the offeror will not make any claim for payment of its costs incurred to the date of the offer, is a fundamentally abstracted notion from the practical perspective of the engaged litigant confronting the management of the proceeding and the appropriation of expenditure to conduct it. An offer, on the other hand, that invites discontinuance of a claim on the payment of the offeror's costs to date offers not very much at all other than the stemming of future costs which in a particular case may nevertheless be very real.
24 I have no doubt that the first offer was made in good faith. To use the description "not genuine" in respect of that offer might be thought to carry with it a pejorative quality which sits uneasily with regarding the offer as one made in good faith and with a recognition that a party which gives up half of what would otherwise be an entitlement to all of its party and party taxed costs to date on discontinuance is truly giving up something. Further, acceptance of the first offer would have given rise to an enforceable contract of compromise. For those reasons, and with all due respect to those who in earlier cases have used the adjectival description "not genuine", its use may be apt to mislead. I should prefer not to use that description.
25 Instead, in respect of the first offer, I prefer to approach the exercise of the discretion as to the basis upon which taxation should be directed to occur by accepting that it was truly an offer and that ultimately Termicide secured a more favourable outcome but considering whether the rejection of that first offer was unreasonable or imprudent in the then circumstances.
26 At that stage, a summary judgment application had been heard and was awaiting determination. Granitgard had some scientific advice in respect of what it thought was Termiglass which suggested that its properties were such that it did not provide an effective barrier to subterranean entry notwithstanding what was said in the CSIRO Appraisal. Granitgard disputed that what had been tested was truly what was or what came to be known as Termiglass. As events transpired I dismissed Termicide's summary judgment application early in the month which followed the making of the first offer, Granitgard Pty Ltd ACN 007 427 590 v Termicide Pest Control Pty Ltd ACN 093 837 337 [2008] FCA 55 but ultimately at trial concluded that Granitgard had not proved that the crushed glass which had been the subject of its then scientific advice was or was what came to be called Termiglass.
27 The first offer strikes me as something of an afterthought following the hearing of the summary judgment application. In the principal judgment I have described Granitgard and Termicide as bitter market rivals. The submission made in the letter which covered the first offer did not, in my opinion, add anything of substance to the submissions which had already been made on behalf of Termicide on the hearing of the summary judgment application. Granitgard was invited to undertake a "literature search" in respect of the use overseas of particle barriers but it already had in its possession advice from two experts, Dr Holt and Dr Ewart as to what was then believed to be Termiglass. Relative to the costs which later came to be incurred, Termicide's costs at the time when the offer was made must have been modest. It was nonetheless offering to give up something by offering to forgo half of its taxed costs at that stage. Precisely how much was being offered to be given up is controversial. It may have been as much as $20,134.00 or it may have been less than that, depending on the view that one takes as to the likely outcome of a party and party taxation in respect of Termicide's costs at that stage. There was conflicting evidence before me on that subject. However one quantifies it though, there was, in this sense, an element of compromise in the first offer.
28 Whether Termicide had engaged in misleading or deceptive conduct via statements on its website was under challenge supported by affidavit evidence from expert scientists, not mere assertion. It was not a frivolous claim. It raised triable issues. Granitgard's claim was for injunctive relief. Termicide offered to make not the slightest alteration in its website. Nor, for example, did it promote a compromise which included some lateral solution such as further, independent appraisal as against the Australian Standard of what was undoubtedly the product marketed as Termiglass. At that stage, there truly were great unknowns for each side as to how, ultimately, the merits of the claim as then pleaded might come to be determined. Though there was an element of compromise in the first offer, that offer was worse than a "walk away" offer. With all due respect, viewed in the then prevailing circumstances, it was a derisory offer. Taking into account the commercial interests at stake and the then stage of proceedings, including the evidence then to hand and the risks of litigation, it was not, in my opinion, an offer the refusal of which was either imprudent or unreasonable on Granitgard's part. That is so even assuming in Termicide's favour that the first offer involved it giving up as much as $20,134.00.