Great Scott International Pty Ltd & Anor (No 3) v Cosmetic Suppliers Pty Ltd & Anor

CATCHWORDS: Costs - Unfair contract - Indemnity costs - Offer of compromise - Applicants successful in unfair contract claim - judgment exceeded offer of compromise - Onus on respondent - Generally exceptional circumstances are required to justify order denying entitlement to indemnity costs - Respondents failed to discharge onus - Indemnity costs granted

District Court Rules 1973 LEGISLATION CITED: Industrial Relations Act 1996 Industrial Relations Commission Rules 1996 Supreme Court Rules 1970

Beith v Racing NSW (No 2) [2007] NSWIRComm 141 Cosmetic Suppliers Pty Ltd & Anor v Great Scott International Pty Ltd & Anor [2007] NSWIRComm 257 George Stewart v All-Fect Distributors Limited and Ors (No 2) [2006] NSWIRComm 303 Great Scott International Pty Ltd v Cosmetic Suppliers Pty Ltd (2005) 147 IR 95 CASES CITED: Great Scott International Pty Ltd & Anor (No 2) v Cosmetic Suppliers Pty Ltd & Anor [2006] NSWIRComm 358 Hilton Nursing Home Pty Ltd v Maciver [2000] NSWIRComm 252 Morgan v Johnson (1998) 44 NSWLR 578 Multicon Engineering Pty Ltd v Federal Airports Corp (1996) 138 ALR 425 South Eastern Sydney Area Health Service & Anor v King [2006] NSWCA 2 Van Huisstede v Commissioner of Police (No 2) (2001) 106 IR 56

APPLICANTS Mr D Chin of counsel Solicitor: Mr S Jauncey Henry Davis York LEGAL REPRESENTATIVES: RESPONDENTS Mr JJE Fernon SC Solicitor: Mr P Brown Baker & McKenzie

GREAT SCOTT INTERNATIONAL PTY LIMITED & ANOR (NO 3) v COSMETIC SUPPLIERS PTY LIMITED & ANOR

Application under s 106 of the Industrial Relations Act 1996

1 On 16 October 2007, the Full Bench dismissed an appeal filed by Cosmetic Suppliers Pty Ltd ("the first respondent") and Sebastian Australia Pty Ltd ("the second respondent"). See Cosmetic Suppliers Pty Ltd & Anor v Great Scott International Pty Ltd & Anor [2007] NSWIRComm 257. 2 In a judgment given on 13 November 2006, I found that a sales agency agreement between Great Scott International Pty Ltd ("the first applicant") and the respondents was unfair pursuant to s 106 of the Industrial Relations Act 1996 ("the Act") and made the following orders: 1. The Sales Agency Agreement between the first applicant and the first respondent is varied so as to provide for notice of termination or payment in lieu thereof of six months.

2. Pursuant to Order 1, the first respondent is to pay to the first applicant an amount equivalent to six months notice. This amount is to be calculated by reference to the total earnings in sales commission over the period of the Sales Agency Agreement, less all operating expenses, except for the second applicant's wages and superannuation averaged over the life of the Sales Agency Agreement, which results in a figure of $11,138.82 per month.

3. Interest is to be paid on that amount calculated in accordance with the Supreme Court scale from the date of the filing the application until the date of this judgment.

4. The respondents shall pay the costs of the applicants as agreed, or as assessed, in accordance with the Rules of the Court. See Great Scott International Pty Ltd & Anor (No 2) v Cosmetic Suppliers Pty Ltd & Anor [2006] NSWIRComm 358. 3 On 20 March 2007, the applicants filed a notice of motion seeking an order that in respect of the costs ordered to be paid, the respondents jointly or severally pay the applicants' costs on a party/party basis from 7 August 2002 to 10 March 2005, as agreed or assessed and on an indemnity basis from 11 March 2005 onwards, as agreed or assessed. 4 In the alternative, the applicants sought that the costs ordered to be paid be paid on the following basis: ... (a) the Respondents to jointly or severally pay the Applicants' costs on a party/party basis from 7 August 2002 to 10 March 2005, as agreed or as assessed; (b) the Respondents to jointly or severally pay the First Applicant's costs on an indemnity basis from 11 March 2005 onwards, as agreed to assessed; (c) the Respondents to jointly or severally pay the Second Applicant's costs on a party/party basis from 11 March 2005 to 12 April 2006, as agreed or assessed; and (d) the Respondents to jointly or severally pay the Second Applicant's costs on an indemnity basis from 13 April 2006 onwards, as agreed or as assessed.

5 In a further alternative, the applicants sought that the respondents pay their costs on a party/party basis from 7 August 2002 to 12 April 2006, as agreed or assessed and on an indemnity basis from 13 April 2006 onwards. 6 The reason for the alternative orders is that the second applicant was not joined to the proceedings until 4 November 2005. 7 I determined that the notice of motion should await the decision of the Full Bench in the appeal and that it should be determined on the written submissions of the parties: See r 203 of the Industrial Relations Commission Rules 1996 ("the Rules"); Hilton Nursing Home Pty Ltd v Maciver [2000] NSWIRComm 252 at [26]. 8 The applicants relied on an affidavit of Stephen Michael Jauncey, a Partner in the firm of Henry Davis York Lawyers and the solicitor on the record for the applicants in the proceedings. That affidavit had attached to it a letter to the respondents' solicitors enclosing an offer of compromise dated 10 March 2005. By fax dated 24 March 2005, the respondents' solicitors rejected the offer of compromise. Had the offer of compromise dated 10 March 2005 been accepted, the first respondent would have only had to pay a total amount of $46,143.40 in principal and interest to the first applicant, rather than a total amount of $66,832.92 in principal and a further amount of $15,589.47 in interest had the orders made in the judgment been applied as at 10 March 2005. 9 Mr Jauncey deposed that as at 10 March 2005, the second applicant had not yet been joined as a party to the proceedings and that if the respondents had accepted the offer of compromise made by the first applicant, that would have brought proceedings in Matter No IRC 4548 of 2002 to an end. The second applicant would have been precluded from bringing a fresh application against the respondents under Div 9 of the Act, as more than 12 months had passed since the termination of the arrangement. Accordingly, s 108B of the Act would have prevented any such claim by the second applicant in the absence of any live proceedings by the first applicant. 10 On 12 April 2006, the solicitors for the applicants served a further offer of compromise on the solicitors for the respondents. Had the offer of compromise dated 12 April 2006 been accepted, the first respondent would have only had to pay a total of $57,654 in principal and an additional amount of $20,471.12 in interest (a total combined payment of $78,125.12). 11 If the orders made in the judgment had been applied as at 12 April 2006, the first respondent would have had to pay a total amount of $66,832.92 in principal and a further amount of $22,148.25 in interest (a total of $88,981.17). 12 Mr Jauncey deposed that the applicants had obtained orders pursuant to the judgment which are no less favourable than the terms of the offer on 12 April 2006. 13 Mr JJE Fernon SC, who appeared for the respondents in opposing the granting of indemnity costs, relied on r 216 of the Rules and submitted that it is necessary that an applicant obtain an order "on the claim to which the offer relates", that is, "no less favourable than the terms of the offer". 14 Senior counsel contended that given the offer made on 10 March 2005 was by the first applicant and the orders made on 13 November 2006 related to claims made by the first and second applicants, it is not possible to determine that the orders of 13 November 2006 were "no less favourable" as required by r 216 of the Rules. In respect of the offer of compromise of 12 April 2006, Mr Fernon contended that this was made by "the applicants" for the respondents to "jointly and severally, pay the applicants, the sum of $57,654." 15 Senior counsel observed that the order made on 13 November 2006 was that the first respondent pay the first applicant an amount equivalent to six months notice. No such order was made in favour of the second applicant or against the second respondent. This led Mr Fernon to submit that it follows that the order made was not an order that was "no less favourable as required by r 216 as no order was made against the second respondent and no order was made in favour of the second applicant." Consideration 16 Rule 216(4) of the Rules 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. ... 17 The principles applicable to an application of this kind were recently summarised by the New South Wales Court of Appeal in South Eastern Sydney Area Health Service & Anor v King [2006] NSWCA 2 where Hunt AJA, (Mason P and McColl JA agreeing) said: [83] Part 52 rule 22 provides that, where a plaintiff who has made an offer of compromise in accordance with Part 22 (Division I) which is not accepted by the defendant, and where the plaintiff obtains a judgment no less favourable than the terms of the offer, then, unless the Court otherwise orders, the plaintiff will be entitled to an order against the defendant for costs on an indemnity basis in relation to his costs incurred from the day after the offer was made. The onus is on the defendant to persuade the Court that indemnity costs should not be ordered. He must demonstrate the basis on which an order should be made denying the plaintiff's entitlement to indemnity costs. He must establish that he had given serious thought to the risk involved in non-acceptance of the offer, and that he had assessed the plaintiff's case properly and in the context of the rule and the achievement of its purpose - to encourage the proper compromise of litigation, in the private interests of the litigants and in the public interest of the prompt and economical disposal of litigation. Generally, exceptional circumstances are required to justify such an order denying the plaintiff's entitlement. See, generally, Fowdl v Fowdl, Court of Appeal, 4 November 1993, unreported, per Kirby P at 12, 16; Hillier v Sheather (1995) 36 NSWLR 414 at 422-423; Morgan v Johnson (1998) 44 NSWLR 578 at 581-582 . (Emphasis added).

[84] Although the Court may take into account the particular features of a case and the difficulty of putting an accurate estimate on its value in advance of the litigation, those considerations do not provide a basis by themselves for denying the party making the offer an order for indemnity costs: Hillier v Sheather (at 423). In Maitland Hospital v Fisher [No 2] (1992) 27 NSWLR 721 at 725, it was said that a miscalculation in a case with large imponderables, where the course taken by the party to whom the offer was made may have been perfectly reasonable, would provide a basis for denying an order, but the subsequent decision in Hillier v Sheather suggests that, whilst "large" imponderables may be a relevant factor in the particular case in denying an order for indemnity costs, in the general case a party's reasonable belief as to his own chances of success does not alone provide a basis for denying an order for indemnity costs. [85] In the present case, the respondent has submitted that the judge had wrongly considered that a belief that the appellants had reasonable grounds for defending the claim constituted exceptional circumstances disentitling her from an order for indemnity costs. However, the fact that the plaintiff's case had changed significantly between the date of the plaintiff's offer and the trial in which the judgment obtained is higher than the amount of the offer does provide a sufficient basis for an order denying the plaintiff's entitlement to indemnity costs: Maitland Hospital v Fisher [No 2] (at 725). The very nature of the situation itself demonstrates that it would be unfair to a defendant to make an order for indemnity costs when the evidence at the trial is different from that known to the defendant at the time of the offer. Whether or not this is an "exceptional" situation does not matter.

18 Hunt AJA referred to the decision of the Court of Appeal in Morgan v Johnson (1998) 44 NSWLR 578 where Mason P, in dealing with offers of compromise in the District Court, summarised the applicable principles from the leading cases dealing with the Supreme Court Rules 1970 and the District Court Rules 1973. His Honour said at 581: The leading cases on the Supreme Court Rules are Maitland Hospital v Fisher [No 2] (1992) 27 NSWLR 721 and NSW Insurance Ministerial Corporation v Reeve (1993) 42 NSWLR 100. The leading cases on the corresponding provision in the District Court Rules are Hillier v Sheather (1995) 36 NSWLR 414, Quach v Mustafa (Court of Appeal, 15 June 1995, unreported) and Houatchanthara v Bednarczyk (Court of Appeal, 14 October 1996, unreported). The following principles can be extracted: (1) The purpose of the rule is to encourage the proper compromise of litigation, in the private interests of individual litigants and the public interest of the prompt and economical disposal of litigation: Maitland Hospital (at 725-726); Hillier (at 421, 431). (2) The aim is to oblige the offeree to give serious thought to the risk involved in non-acceptance: Maitland Hospital (at 724).

(3) The prima facie consequence of non-acceptance will be that the rule will be enforced against the non-accepting party: NSW Insurance Ministerial Corporation v Reeve (at 102); Hillier (at 422). This is because, from the time of non-acceptance "notionally the real cause and occasion of the litigation is the attitude adopted by [the party] which has rejected the compromise": Maitland Hospital (at 724); see also Hillier (at 420). (4) Lying behind the rule is the common knowledge that litigation is inescapably chancy": Maitland Hospital (at 725). For this reason, the ordinary provision is expected to apply in the ordinary case: ibid NSW Insurance Ministerial Corporation v Reeve (at 102-103). The mere fact that it was reasonable for the litigant to take the view that he or she did in rejecting the offer is not enough to displace the rule: NSW Insurance Ministerial Corporation v Reeve (at 102). As Clarke JA expressed it in Houatchanthara (at 2-3): "The rule lays down the general principle that should be applied, and the order provided for in that rule should only be departed from for proper reasons which, in general, only arise in an exceptional case. It is clear that if the rule operates, the plaintiff will be significantly disadvantaged, but that disadvantage flows naturally from the risks of litigation. The idea behind the rule is to encourage settlement or compromise of proceedings, and more specifically, to encourage litigants to give serious consideration to the settlement of proceedings. Where an offer is made by a defendant to a plaintiff, the latter is put on notice that unless he or she accepts that offer, there is a significant risk that the order provided for by the rule may follow. In declining to accept the offer, the plaintiff undertakes the risk and the consequences that flow naturally from that risk." (5) The discretion to displace the rule is a judicial one, requiring the private and public purposes of the rule to be borne in mind: Maitland Hospital (at 725-726). Reasons must be given for "otherwise ordering": Hillier (at 419); Quach . 19 The principles found in King and in the earlier case of Morgan v Johnson have recently been applied by Boland J in George Stewart v All-Fect Distributors Limited and Ors (No 2) [2006] NSWIRComm 303 and by me in Beith v Racing NSW (No 2) [2007] NSWIRComm 141. 20 The respondents assert a distinction between the claim made by the first applicant (to which the offer of compromise of 10 March 2005 relates) and the claim determined in my judgment after the joinder of the second applicant on 4 November 2005. 21 In my view, such a distinction is contrary to the findings of the Full Bench in Great Scott International Pty Ltd v Cosmetic Suppliers Pty Ltd (2005) 147 IR 95 and furthermore is illusory. The Full Bench in Great Scott International at [39] - [41], held that the amended summons seeking to join the second applicant did not constitute a fresh or separate application for an order under s 106 of the Act in that, inter alia, the same complaints were advanced in the amended summons and the same relief by way of variation and money orders sought, other than that payment was to be made to the second applicant, as well as the first applicant. The Full Bench held at [41] that the second applicant merely joined in the attack on the fairness of the arrangement already on foot in the proceedings. 22 The orders made on 13 November 2006 were in respect of the same claim to which the offer of compromise of 10 March 2005 related, namely, a claim by the first applicant for the same money orders arising from the same unfairness of the same impugned arrangement. It is clear that the orders made by me were intended to benefit both applicants in that the second applicant was found to the be the alter ego of the first applicant: Great Scott International (No 2) at [109]. Order 1 resulted in both applicants obtaining an order on the claim to vary the sales agency agreement, albeit, for the payment of money pursuant to the variation of the sales agency agreement to be made to the first applicant for the additional benefit of the second applicant as its alter ego. 23 In my view, both applicants relevantly obtained orders "no less favourable" for the purposes of r 216(4) of the Rules. 24 Even if I were to find that r 216(4) of the Rules did not strictly apply, I would exercise the Court's general discretion to grant the primary order claimed by the applicants. Rule 216(4) of the Rules gives effect to a general approach to offers of compromise (whether or not made under the Rules) entailing, as Rofe J observed in Multicon Engineering Pty Ltd v Federal Airports Corp (1996) 138 ALR 425 at 451, "that there should be a prima facie presumption in the event of the offer not being accepted and in the event of the recipient of the offer not receiving a result more favourable than the offer, that the party rejecting the offer should pay the costs of the other party on an indemnity basis from the date of the making of the offer". See King at [83] - [84]. 25 The respondents have not attempted to argue any exceptional circumstances to relieve them from this presumption: King (at [83]). 26 The first applicant's offer of compromise of 10 March 2005 was substantially below the ultimate result achieved by the applicants in this matter. 27 I find that the respondents have failed to demonstrate exceptional circumstances, such that the applicants should be denied their costs order on an indemnity basis. It follows that it was not reasonable for the respondent to have rejected the first applicant's offer of compromise dated 10 March 2005. 28 Accordingly, I order that the respondents pay the applicants' costs on an indemnity basis from 11 March 2005. In arriving at this decision, I am of the view that such an order should be made to meet the requirements of justice. I am also mindful of the observations of Walton J, Vice-President in Van Huisstede v Commissioner of Police (No 2) (2001) 106 IR 56 that the granting of indemnity costs does not involve consideration of a punitive nature. ORDERS 29 The Court makes the following orders:

1. The respondents are to pay the applicants' costs in matter No IRC 4548 of 2002 on a party/party basis, up to 10 March 2005, as agreed, or as assessed in accordance with the Court's Rules.

2. The respondents are to pay the applicants' costs on an indemnity basis in respect of matter No IRC 4548 of 2002 on and from 11 March 2005.

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