IFTC Broking Services Limited v Commissioner of Taxation

1. The appellants pay the respondent's costs of the appeal incurred up to 11.00 am on 23 September 2009 on a party and party basis and thereafter on an indemnity basis.
2. The appellants pay the respondent's costs of the respondent's application for indemnity costs, as agreed or taxed on a party and party basis. Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website.

the court: 1 On 10 March 2010 we dismissed an appeal against an order for costs (IFTC Broking Services Limited v Commissioner of Taxation [2010] FCAFC 22). 2 The respondent, the Commissioner of Taxation, seeks an order that the appellants pay costs of the appeal including costs on an indemnity basis from the date on which the Commissioner made an offer of compromise under O 23 of the Federal Court Rules. 3 Order 23 of the Federal Court Rules concerns offers of compromise. It is common ground between the parties that the Commissioner's offer, and the appellants' failure to accept it, engages O 23 r 11(6) which is in the following terms: (6) If: (a) an offer is made by a respondent and not accepted by the applicant; and (b) the respondent obtains an order or judgment on the claim to which the offer relates as favourable to the respondent, or more favourable to the respondent, than the terms of the offer; then, unless the Court otherwise orders: (c) the respondent is entitled to an order that the applicant pay the respondent's costs in respect of the claim incurred up to 11 am on the day after the day the offer was made, taxed on a party and party basis; and (d) the respondent is entitled to an order that the applicant pay the respondent's costs in respect of the claim incurred after that time, taxed on an indemnity basis. 4 The appellants appealed against an order for costs made on 13 July 2009. The order required the appellants to pay one quarter of the Commissioner's costs of the Commissioner's notice of motion filed on 11 May 2009 seeking interlocutory orders freezing certain of the appellants' assets. The primary judge dismissed the Commissioner's motion. As discussed in our principal reasons for judgment the primary judge did so because, ultimately, the appellants offered undertakings in appropriate terms which were sufficient to preserve the subject matter of the dispute. In these circumstances the appellants, according to the primary judge, "were the "seemingly" successful party because the Commissioner's motion was dismissed". However, the course by which the appellants offered and refined their proposed undertakings over four hearing days was seen by the primary judge to constitute "special" circumstances justifying the making of the costs orders against the appellants (IFTC Broking Services Limited v Commissioner of Taxation [2010] FCAFC 22 at [16] and [17]) 5 The background facts are simple. By a notice of motion filed on 23 July 2009 the appellants sought leave to appeal against the order for costs. Jacobson J granted the appellants leave to appeal on 14 August 2009. The appellants filed their notice of appeal pursuant to this grant of leave on 3 September 2009. On 22 September 2009 the Commissioner made an offer of compromise in accordance with O 23. The Commissioner offered to consent to the making of orders that there be no order as to costs in respect of both the notice of motion filed 11 May 2009 and the appeal. The offer was open for 14 days. The appellants did not accept the offer. Instead, the appellants prosecuted the appeal by which they sought orders setting aside the primary judge's costs order and that the Commissioner pay their costs of the notice of motion filed 11 May 2009 including costs on an indemnity basis from 20 May 2009 onwards. The appellants were unsuccessful. 6 The submissions of the Commissioner and the appellants accepted that O 23 applies to appeals. This is consistent with the assumption founding the decision in Futuretronics.com.au Pty Ltd v Graphix Labels Pty Ltd [2009] FCAFC 40 at [8]-[9]. The submissions also accepted that the Commissioner obtained an order or judgment more favourable than the terms of the offer thereby engaging O 23 r 11(6). We proceed on the basis that these common assumptions are well-founded. Accordingly, the issue is whether we should "otherwise" order as contemplated by O 23 r 11(6), failing which the consequences specified in that provision follow (namely, that the appellants pay costs taxed on a party and party basis until 11.00 am on 23 September 2009 and on an indemnity basis thereafter). 7 The appellants submitted that we should otherwise order. According to the appellants: (1) The prima facie position established by O 23 r 11(6) can be departed from (Futuretronics at [12]). (2) The broad discretionary power in respect of costs conferred by s 43 of the Federal Court of Australia Act 1976 (Cth) cannot be confined by treating O 23 r 11(6) as creating a presumption able to be rebutted only in an exceptional case (cf Port Kembla Coal Terminal Ltd v Braverus Maritime Inc (No 2) (2004) 212 ALR 281; [2004] FCA 1437 at [17]). Such an interpretation would fetter the scope of the discretion impermissibly and contrary to the recent statement of principle in Howards Storage World Pty Ltd v Haviv Holdings Pty Ltd [2010] FCAFC 5. (3) The appellants failure to accept the offer must be considered by reference to the period of the offer between 22 September and 6 October 2009 and not with the findings in our principal judgment delivered on 10 March 2010 in mind (Seven Network Ltd v News Ltd (2007) 244 ALR 374; [2007] FCA 1489 at [65]). (4) In determining the application for leave Jacobson J made observations supportive of the appellants' appeal. The grant of leave shows that the appellants achieved the "formidable task" (Lenijamar Pty Ltd v AGC (Advances) Limited (1990) 27 FCR 388 at 393) of persuading Jacobson J that the primary judge's costs order was attended by sufficient doubt and error of principle as to warrant reconsideration by a Full Court so as to avoid substantial injustice (Décor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397 at 398-399). (5) The appellants' refusal to accept the offer occurred in circumstances different from those that ordinarily would justify an order to pay indemnity costs (Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Ltd (1988) 81 ALR 397 at 401). The appeal was not fundamentally flawed, as the grant of leave to appeal demonstrates. (6) Futuretronics is distinguishable. In that case the respondent's solicitor sent a letter to the appellant's solicitor explaining why the appeal would fail. The appeal was dismissed on the same basis as explained in the letter. By contrast, in the present case, the appellants were granted leave to appeal and did not receive any similar correspondence. (7) The offer expired on 6 October 2009. The Full Court's decision in Howards Storage World was not then available. That decision clarified the relevant principles with respect to the discretion to order costs. We referred to that decision in our principal reasons at [7]-[8]. (8) Accordingly, it would be an "unjust and impermissibly mechanical application" of the discretion conferred by s 43 of the Federal Court of Australia Act for O 23 r 11(6) to apply. 8 These submissions are not supported by either the relevant authorities or the facts of the present case. 9 It may be accepted that the prima facie position established by O 23 r 11(6) can be departed from. So much is clear from the statement of exception in the rule which the appellants seek to invoke ("unless the Court otherwise orders"). The cases say more than this, however. The cases establish that: (1) If O 23 r 11(6) is engaged it is for the applicant to satisfy the Court that the prima facie position established by that rule should be departed from (Futuretronics at [12]). (2) Unlike a case in which a Calderbank offer (named after the decision in Calderbank v Calderbank [1975] 3 All ER 333) is made, the fact that an unsuccessful litigant acted reasonably in rejecting an offer of compromise "is not of itself a sufficient reason to displace the operation of the rule" (Futuretronics at [11]). (3) It is true that doubts have been expressed about a need to show "compelling and exceptional circumstances" to justify otherwise ordering (see Port Kembla Coal Terminal at [17]). Nevertheless, properly understood, the rule creates a presumption in favour of indemnity costs which the unsuccessful party must rebut. A court may depart from the presumptive position but only "for proper reasons which, in general, only arise in an exceptional case" (Port Kembla Coal Terminal at [17] cited with approval in Futuretronics at [10]). (4) The requirement for "proper reasons" for any departure from the prima facie position of indemnity costs reflects the purpose of the rule. As explained by Mason P in Morgan v Johnson (1998) 44 NSWLR 578 at 581F-582E the rule is intended to encourage the compromise of litigation (such compromise being in both the private and the public interest) and to oblige parties "to give serious thought to the risk involved in non-acceptance" on the basis that "litigation is inescapably chancy" (Maitland Hospital v Fisher [No 2] (1992) 27 NSWLR 721 at 725). For these reasons "the ordinary provision is expected to apply in the ordinary case" (referring to New South Wales Insurance Ministerial Corporation v Reeve (1993) 42 NSWLR 100 at 102-103). 10 When evaluated against these principles it is apparent that the appellants have not established a proper basis for departure from the ordinary consequence of their refusal to accept the Commissioner's offer of compromise. 11 Howard Storage World does not concern the operation of O 23 r 11(6). That decision did not establish any new principle about the costs discretion. It did not involve an offer of compromise and thus the decision says nothing about the interaction between s 43 of the Federal Court of Australia Act and O 23 r 11(6) of the Federal Court Rules. 12 Futuretronics exposes the difference between a Calderbank offer and an offer of compromise. In respect of a Calderbank offer, characterisation of the refusal to accept the offer as reasonable or not is significant, even potentially determinative. In respect of an offer of compromise, the reasonableness of the refusal to accept the offer is not, of itself, sufficient to displace the consequence of indemnity costs. The appellants' reliance on various circumstances said to make their refusal of the offer reasonable fails to confront this difference of principle. 13 The immediately preceding point also undermines the appellants' reliance on the circumstances during the time the offer was open for acceptance. Moreover, the rule itself directs attention to the outcome of the litigation, a fact not known at the time of the offer. In any event, circumstances did not alter between the time of the offer and the order we made dismissing the appeal. The conclusions we reached were based on facts known to the appellants when they decided not to accept the offer. 14 The "formidable task" to which reference was made in Lenijamar isthat of persuading an appellate court to disturb an order made in the exercise of discretion on a matter of practice and procedure. At all times the appellants carried that heavy burden of persuasion. The grant of leave to appeal did not lessen the appellants' burden. It cannot be relied upon as a proper reason to escape the ordinary consequences of O 23 r 11(6) in the ordinary case. The appellants' focus on comments made during the leave application is also misplaced. Jacobson J did not give reasons for the grant of leave. In any event, if comments made in passing on a leave application could be material, the comments are mostly nothing more than an indication that his Honour had understood the appellants' submissions, a challenge in order better to understand a submission, or a statement of the limited capacity for a detailed review of the facts on a leave application. The comments did not displace the appellants' obligation to consider the offer with due regard to the purpose and effect of O 23 r 11(6) or their assumption of the risk of non-acceptance having regard to the terms of the rule. 15 The circumstances in which an order for indemnity costs ordinarily would be made are immaterial. O 23 r 11(6) does not depend on any delinquency by a party to justify the making of an indemnity costs order. As the discussion in Morgan v Johnson discloses the rules relating to costs in respect of an offer of compromise have their own purpose. 16 The problem for the appellants is that this is an ordinary case. The appellants were subject to a costs order they did not like. They chose to seek leave to appeal and, having obtained leave, to prosecute their appeal. By their appeal they challenged the primary judge's broad discretion in respect of costs. They sought to set aside the primary judge's order and obtain a re-exercise of discretion in their favour including an order for indemnity costs against the Commissioner. They received an offer of compromise which, if accepted, would have resulted in the appellants being subject to no costs orders either before the primary judge or in the appeal. They did not accept the offer but instead chanced their hand in the inherently risky business of litigation in circumstances where, as an appellant seeking to disturb a discretionary order, they (not the Commissioner) faced the "formidable task" of identifying material error. The fact that various circumstances, including the grant of leave, might have led the appellants to believe their case had reasonable prospects of success is insufficient. The appellants have not identified any fact, matter or circumstance which would provide a proper and principled basis for making an order displacing the ordinary consequence of their refusal to accept the Commissioner's offer of compromise. 17 For these reasons we are not satisfied that we should "otherwise" order as referred to in O 23 r 11(6). It follows that the costs consequences in the rule are engaged. We order accordingly. I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Stone, Edmonds and Jagot.