Nowra Radiology Pty Ltd v Macintosh

Federal Court of Australia|2020-12-02|Before: Stewart J

Subject to any previous costs orders, the parties are to bear their own costs in the proceeding. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 The background to this dispute is set out in previous reasons for judgment in the matter in relation to the adoption of a referee's report, namely Nowra Radiology Pty Ltd v Macintosh [2020] FCA 731. 2 On 29 September 2020, I made orders by consent dismissing the proceeding as a whole, subject to the question of costs which was reserved and which came before me this morning for decision. 3 For present purposes, the background to the dispute can be summarised as follows. 4 The third applicant, Janet Macintosh, and the respondent, Peter Macintosh, established a radiology practice based in Nowra styled "Nowra Radiology" in about 2014. Some years later, in February 2017, Janet and Peter - who are siblings and who for convenience I will refer to by their first names but mean no disrespect in doing so - executed a settlement agreement which set the terms on which they parted company in relation to the business. It provided that Janet would keep the business and she would pay Peter a substantial sum of money. 5 A dispute then arose between them with regard to domain names, one that was used by the business and another which also incorporated the name of the business but which had not been used by it. Peter had control of the domain names, and Janet wanted them for the business. Janet and two corporate entities associated with her, the first applicant and the second applicant, then commenced the proceeding. They sought relief against Peter that can be summarised as follows: (1) A declaration and an injunction in relation to the domain names designed to ensure that they come under the control of the business. (2) Unspecified damages in relation to Peter's conduct in relation to the domain names - being that he allegedly caused a brief disruption in service. The damages were later particularised as amounting to approximately $3,800. (3) A declaration that Peter had breached his duties as a director of the corporate applicants. (4) The recoupment of allegedly unauthorised payments made by Peter from the business which were later particularised as amounting to approximately $23,000. (5) Unspecified damages for breach of contract which were subsequently particularised as being approximately $39,000. 6 The relief in relation to the domain names was resolved in May 2020 after Peter made an open offer to transfer the domain names to the control of the applicants without admission of any liability to do so. As will be seen, although the proceeding continued for the next four or five months, that resolution of the dispute with regard to the domain names provided the basis for the ultimate resolution of the proceeding being that the balance of the relief was dismissed by consent, subject to costs, on 29 September 2020.

Additional background 7 It is necessary to set out more background in order to deal with the parties' submissions with regard to costs. 8 On 27 October 2017, solicitors on behalf of the applicants wrote to the respondent demanding delivery up and transfer of one of the domain names, and asserting that there had been an interruption in service in relation to that domain. It was asserted that arising out of the settlement by which Janet and Peter parted company in relation to the business, the domain name was the property of the business and should have been given up and control transferred at that time. 9 On 9 November 2017, solicitors on behalf Peter replied. By that reply, Peter denied the applicants' claims to the domain name and asserted that he had registered the domain name, and rightly retained control of it. 10 On 19 July 2018, Janet wrote to Peter, offering to pay him $2,000 for the domain name, although asserting that it was actually the property of the business. She said that if agreement could not be reached with regard to transferring the domain name to the business then proceedings would be commenced. 11 Peter ultimately replied on 31 August 2018. He said that he was considering the offer, that his original expectation would have been a figure closer to $10,000 but that he was willing to compromise, saying that he would find an offer of about $4,500-$5,000 more satisfactory. He also said that Janet might be interested in the "companion" domain name which, he said, was also available. He said that he would favourably consider a lesser figure of $1,000 in relation to that domain name which was the domain that had not been used by the business but nevertheless incorporated its name. I infer that until that time the applicants were unaware of the registration of that domain name or that Peter had control of it. 12 Thereafter, in November 2018, the proceeding was commenced in which the relief identified above was sought. 13 On 30 September 2019, solicitors acting for Peter made an offer "without prejudice save as to costs" to the applicants. The substance of the offer was that Peter would transfer the domain names within 14 days of the execution of a deed of settlement and that he would pay the applicants $25,000, also within 14 days. The offer was said to have been made in accordance with the principles in Calderbank v Calderbank [1975] 3 All ER 333. 14 On 25 October 2019, solicitors for the applicants rejected the offer. They also put a counteroffer, the terms of which are not presently relevant. 15 On 28 February 2020, I made orders under s 53A of the Federal Court of Australia Act 1976 (Cth) referring the matter to mediation to be conducted by a registrar of the Court. The mediation continued over the period 8 April to 8 May 2020. 16 On 17 April 2020, which is to say during that period, the applicant made another offer "without prejudice save as to costs".

Admissibility of settlement offer 17 Evidence of that offer is objected to by the applicants on the basis that it is inadmissible under s 53B of the Federal Court Act. That provision provides as follows: 53B Admissions made to mediators Evidence of anything said, or of any admission made, at a conference conducted by a mediator in the course of mediating anything referred under section 53A is not admissible: (a) in any court (whether exercising federal jurisdiction or not); or (b) in any proceedings before a person authorised by a law of the Commonwealth or of a State or Territory, or by the consent of the parties, to hear evidence. 18 It is to be noted that the offer was conveyed by email from Peter's solicitors to, amongst others, a registrar of this Court and the case file email address at the Court. At that time, the parties were engaged in a mediation conducted by that registrar. The mediation was conducted remotely on Microsoft Teams and not in person which, so I infer, meant that it proceeded in a less continuous way than might otherwise have been the case. I do not understand the email to have been sent while the parties were actually engaged remotely in mediation in the sense of being on Microsoft Teams with each other or with the mediator, but at some time between when the mediation commenced and before it was terminated. 19 In any event, it is submitted on behalf of the applicants that the email communication amounted to something "said … at a conference conducted by a mediator in the course of mediating" within the meaning of the provision. The respondent submits that the offer was conveyed in correspondence and was therefore not something "said" at a conference in the course of mediating. 20 It is apparent that the two questions that arise are whether the word "said" covers something that is expressed in writing rather than orally and whether the email was conveyed "at a conference conducted by a mediator". 21 I was referred to Pinot Nominees Pty Ltd v Commissioner of Taxation [2009] FCA 1508; 181 FCR 392. In that case, one of the parties referred to three offers of compromise, including two which had been made during the course of a mediation conference: at [9]. It was recorded that an order had been made referring the parties to mediation before a registrar, a mediation conference had been held and subsequently adjourned on two occasions and ultimately the proceeding was not settled and it was listed for trial: at [5]-[6]. 22 Siopis J held that s 53B of the Federal Court Act can be reconciled with s 131(2)(h) of the Evidence Act 1995 (Cth) - which allows a communication or document that is relevant to determining liability for costs to be admissible as an exception to the exclusion of evidence of settlement negotiations - on the basis that the latter section applies to "without prejudice" communications other than those communications which are made during the course of a mediation conference to which s 53B applies: at [30]. On that basis, evidence of the two offers that were made during the course of the mediation was ruled inadmissible: at [31]. 23 In Forsyth v Sinclair (No 2) [2010] VSCA 195; 28 VR 635 at [13]-[15], Neave and Redlich JJA and Habersberger AJA approved the "reconciliation" by Sipois J in Pinot Nominees in relation to analogous provisions, and the Court emphasised the importance of parties being left free at mediation to explore all avenues of settlement without the fear that something said or done will be referred to later without their agreement. See also Harcourts WA Pty Ltd v Roy Weston Nominees Pty Ltd (No 6) [2016] FCA 1492 at [64]-[65] per McKerracher J. 24 Aside from reconciling s 53B with the provision in the Evidence Act, Pinot Nominees is of little assistance for present purposes because it does not establish whether what is "said" in a mediation conference includes something that is written during the course of the conference as opposed to spoken, and it does not establish the scope of the meaning of "at a conference". 25 In my view, there is no sensible distinction to be made between something that is spoken and something that is written with reference to the underlying purpose of s 53B - which is clearly to promote settlement through parties being able to be candid with each other and the mediator during the mediation of a dispute without fearing that their candour will be held against them if the mediation fails. For example, there is no reason why something that is written down and passed across the table at a mediation conference should not enjoy protection when if it had instead been spoken it would have been protected. The word "said" does not in ordinary meaning necessarily convey something that was spoken. It is common to speak of what was "said" in a letter or other document, for example. 26 On that basis, I conclude that the contents of the email communication of 17 April 2020 which conveyed an offer to settle was something that was "said". I note that McKerracher J in Harcourts WA at [65] appears to have accepted that an offer conveyed in writing can enjoy the protection of s 53B. 27 There is also no apparent reason why the phrase "at a conference conducted by a mediator" should be narrowly construed. A mediation may be conducted in various ways which frequently include, for example, the furnishing of position papers in writing in advance of an actual mediation "meeting", the mediator shuttling between the parties including on the telephone or by some other remote means, and the mediation "meeting" being adjourned from time to time with mediation efforts being undertaken in the meanwhile. In my view, the words in question are apt to include correspondence exchanged between the parties or between a party and the mediator which is exchanged "in the course of mediating" the dispute and otherwise for the purpose of the mediation. 28 It follows that in my view, given that the mediation was still open and the correspondence was copied to the mediator with the clear aim of endeavouring to settle the dispute and in that way further the purpose of the mediation, it was made "at a conference" conducted by the mediator in the course of mediating the dispute and is therefore inadmissible under s 53B. 29 In the circumstances, it is not necessary to go into the detail of that offer.

Applicable principles 30 In Chapman v Luminis Pty Ltd [2003] FCAFC 162 at [7] per Beaumont, Sundberg and Hely JJ, the following principles were identified as being applicable in circumstances such as the present where costs are to be determined without there having been a determination by the court of the underlying dispute which no longer requires to be determined: (1) Where a proceeding terminates before there has been a hearing, the court should not resolve the issue of costs by engaging in something in the nature of a hypothetical trial. (2) This does not mean that a court can never make an order for costs in the circumstances. Often it will be unable to do so, but in other cases an examination of the reasonableness of the conduct of the parties may provide the basis for an order, or a judge may be confident that one party was almost certain to have succeeded if a matter had been fully tried. (3) A distinction is to be drawn between cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event or settlement so removes or modifies the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs. In the former type of case, there will commonly be lacking any basis for an exercise of the court's discretion otherwise than by an award of costs to the successful party. It is the latter type of case which often creates problems, since there may be difficulty in discerning a clear reason why one party, rather than the other, should bear the costs. 31 As observed by McHugh J in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin [1997] HCA 6; 186 CLR 622 at 625, if it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. See also Rickus v Motor Trades Assn of Australia Superannuation Fund Pty Ltd [2010] FCAFC 16; 265 ALR 112 at [118] per Jacobson, Siopis and Foster JJ where it was recognised that it is not the function of the court to make a prediction as to the outcome of a hypothetical case. 32 Since, as will be seen, the respondent characterises the ultimate dismissal of the proceeding by consent as being akin to the applicants discontinuing the proceeding, it is relevant to identify the principle that applies in such a circumstance. The general rule, which reflects the underlying policy of the rules of court in r 26.12(7) of the Federal Court Rules 2011 (Cth), is that the discontinuing party should be liable for the other party's costs unless the court orders otherwise. See Elevate Brandpartners Ltd v Hammond (No 4) [2020] FCA 421 at [24].

The parties' orders and submissions 33 The applicants seek the following orders: 1. The respondent is to pay the applicants' costs of the proceeding up to 5 May 2020, as agreed or assessed. 2. Each party is to bear its own costs of the proceeding from 5 May 2020 to 29 September 2020. 3. The respondent is to pay the applicants' costs of and incidental to the costs application heard on 2 December 2020. 34 The respondent seeks the following orders: 1. The applicants are to pay 80% of the respondent's costs of the proceedings up to 20 September 2019. 2. The applicants are to pay the respondent's costs of the proceedings from 20 September 2019 up to 5 May 2020, on an indemnity basis. 3. The applicants are to pay the respondent's costs of the proceedings from 5 May 2020 to 29 September 2020, on an indemnity basis. 4. The applicants are to pay the respondent's costs of and incidental to the costs application heard on 2 December 2020. 5. The costs referred to in orders 1 to 4 are to be as agreed or assessed pursuant to Part 7 of the Legal Profession Uniform Law Application Act 2014 (NSW), pursuant to r 40.02(c) of the Federal Court Rules 2011 (Cth), to be applied whether those costs were incurred within or outside New South Wales. 35 The applicants submit that the relief in relation to the domain names was always the principal motivating factor behind the proceeding and its most important or significant aspect. In that regard they refer to the correspondence that preceded the commencement of the proceeding, which I have set out above, as well as other correspondence in which it was asserted that the domain names were worth at least $100,000 to the applicants in view of a contract that they had with third parties which was otherwise imperilled. 36 The applicants submit that the respondent, by ultimately offering up the domain names in an open offer, effectively capitulated on the essential part of the dispute between the parties and that they thus enjoyed "practical success". That is a reference to terminology used by Garling J in King v Flowers [2014] NSWSC 1266. In that case, the plaintiff sought "an order for possession of a commercial property at Bowral … [and] the statement of claim particularised a claim for damages for trespass and sought an order for mesne profits until the possession of the property was given up": at [2]. The defendants defended the claim but ultimately gave up possession of the property. The plaintiff sought to discontinue the proceeding, thereby abandoning her damages claim, and sought her costs: at [20]-[21]. 37 Garling J ordered the defendant to pay all of the plaintiff's costs because his Honour was satisfied that the plaintiff had achieved "practical success" (at [55]; see also [60]), the proceedings "were reasonably and properly brought … seeking possession of the property" where, it was "fair to say … the defendant showed no intention whatsoever of giving up possession of the property at all" (at [56]-[57]), and "the defendant has plainly acted unreasonably", including by retaining possession without apparent basis and by contesting litigation until the time he gave up possession (at [62]). 38 The applicants submit that the same or analogous circumstances apply in this case as in King v Flowers. On that basis they say that they should have their costs up until 5 May 2020 when the respondent offered up the domain names. 39 In respect of the period thereafter until the proceeding was dismissed, the applicants submit that it cannot be said that one party or the other won, or acted unreasonably, with the result that each should bear its own costs. 40 The respondent first made submissions in respect of the period after 5 May 2020. He submits that in respect of that period the applicants had effectively discontinued the proceeding and therefore in accordance with the general rule identified above they should pay his costs. He says that there was no settlement or supervening event as referred to in the third principle identified in Chapman above such as to remove or modify the subject of the dispute and that there is therefore no basis upon which each party should bear its own costs. 41 In respect of the period before 5 May 2020, the respondent makes two principal submissions. The first is that the "without prejudice" offering up of the domain names was not a capitulation - it was done without prejudice and to work out whether or not it amounts to a capitulation would involve the court in an exercise of predicting the outcome of a hypothetical case which is contrary to the first principle identified in Chapman above. The respondent also submits that the fact that the applicants had previously rejected the Calderbank offer which offered them the domain names plus the payment of $25,000, and that even after they achieved success with regard to the domain names in May 2020 they continued the proceeding for another four or five months, demonstrates that the domain names issue was not the principal or dominant issue or the driving factor behind proceeding. 42 The second submission is that there were originally five identified issues in the proceeding, of which the domain names was one. On that basis, giving up on the domain names meant that only one fifth, or 20%, of the issues in the proceeding were thereby resolved. The respondent therefore submits that he should have 80% of his costs up until 5 May 2020. 43 The respondent also makes a submission that sits alongside those two principal submissions that I have identified, namely that the applicants rejected the Calderbank offer that was made in September 2019 and thereafter achieved less than what had been offered. On that basis, the respondent says that the applicants should pay the costs thereafter, and on an indemnity basis in accordance with the principles underlying Calderbank offers.

Consideration and disposition 44 It is convenient to deal first with the Calderbank offer. In that regard it is to be noted that under the rules of court (rr 25.14(1) and (2)), an offer of compromise that is made by a respondent and not accepted by an applicant gives rise to an entitlement to indemnity costs only if (1) the applicant subsequently obtains a judgment that is less favourable than the terms of the offer or (2) the applicant unreasonably fails to accept the offer and the applicant's proceeding is dismissed. It is only the latter circumstance that could be thought to apply, except that the proceeding was dismissed only after an undeniably significant part of the relief had been acceded to. In those circumstances it is doubtful that it does apply. 45 Outside of the rules of court, a Calderbank offer will form a basis for indemnity costs if it was unreasonably rejected by the offeree and the offeree ends up worse off than if the offer had been accepted: Taleb v GM Holden Ltd [2011] FCAFC 168; 286 ALR 309 at [48]-[49] per Finn and Bennett JJ. An initial comparison is thus required of the terms of the offer and the outcome achieved by the offeree, in order to determine whether Calderbank principles are enlivened at all, but the outcome may also be central to the reasonableness inquiry: Bashour v Australian and New Zealand Banking Group Ltd [2017] FCA 163 at [148] per Tracey J. On that basis I need to know what the applicants' entitlements would otherwise have been. To put it differently, I would need to know the outcome of the case. That is because maybe they were entitled to not only the domain names but also the monetary sums amounting to approximately $66,000 plus interest and costs. If they were, and in view of the costs that they had already incurred by the time that the Calderbank offer was made - in respect of which there is evidence that need not be detailed here, then their rejection of the Calderbank offer was not unreasonable. If, on the other hand, they had no entitlement even to the domain names, then clearly their rejection of the offer was entirely unreasonable. It seems to me, also, that if their entitlement was only to the domain names, which is what they achieved and no more, then the rejection may have been unreasonable. 46 Given that I do not know what the applicants' entitlements actually were, and for good reason I will not speculate with regard to that, I am simply not in a position to say that the Calderbank principles are enlivened or to judge the unreasonableness or otherwise of the rejection of the Calderbank offer. In the circumstances, the Calderbank offer cannot be the foundation for an order that the applicants be liable for indemnity costs thereafter. 47 The early correspondence demonstrates how once litigation commences, costs are incurred and positions entrenched, it becomes far more difficult to resolve disputes and the potential for everyone to be worse off increases. Peter initially indicated that he might accept $11,000, or perhaps $5,500, for the two domain names. Janet was apparently suspicious of him since she had not known of the second domain name prior to that indication being given. When she commenced the proceeding she also sought the monetary sums and the declaration with regard to breach of directors duties. In the end, Peter gave up the domain names and received nothing. Janet got the domain names, but gave up the other relief. Both parties have incurred substantial sums in costs. They are undoubtedly worse off than they would have been if they had resolved the matter early on. 48 Hindsight is easy, and it does not answer the question, "what should now be done with regard to the costs?" It does however point to the considerable value in making a costs order that will limit the costs that still have to be incurred in the assessment of costs, and which limits the scope for ongoing disputes between the parties with regard to those costs. 49 I cannot be satisfied that one party or the other would almost inevitably have succeeded. It is true that Peter ultimately gave up on the domain names and in the totality of the circumstances it looks like he may have had little if any justification for retaining them in the first place. There is, however, no way that I can determine that unless I enter into a trial on the merits. This is therefore not a case where, even in relation to just the domain names, it can be said that the respondent effectively surrendered to the applicants. For that reason this case is not as closely analogous to King v Flowers as the applicants submit. 50 It might be thought that given that the applicants gave up their monetary claims, they could have had little confidence in succeeding in them, particularly given that by then the matter was close to ready for trial. But against that, they recorded at the time that they gave up on those claims only because of the disproportion between them and the likely future costs of pursuing them. There is something to be said for the submission that those claims would not have been pursued on their own. Parties should not be discouraged by adverse costs orders from sensibly bringing proceedings to an end when insufficient is left at stake to justify the continuing costs. In the circumstances, I cannot conclude that the applicants effectively surrendered to the respondent even in the later period. 51 In my view the intervening settlement between the parties in relation to the domain names, which was formalised in a deed in May 2020, provided the essential platform to the ultimate resolution of the dispute by the dismissal of the remaining relief by consent. Those events constitute supervening events or settlement that had the effect of removing the subject of the dispute such that it cannot be said that one side has simply won; both won and both lost. This case accordingly falls within the second of the categories of cases identified in the third principle in Chapman above. That is to say, there is difficulty in discerning a clear reason why one party, rather than the other, should bear the costs. 52 With reference to Lai Qin from which I have quoted above, although I am not convinced that both sides have acted reasonably at all stages in commencing and defending the proceeding "until the litigation was settled or its further prosecution became futile", I am not in a position to identify that either side acted unreasonably without going into the merits. 53 An appreciation of what I have said in the preceding two paragraphs points to a costs order that the parties bear their own costs in the proceeding. That is what Chapman and Lai Qin suggest. Such an order has the added advantage that the parties will have no need to incur further costs to determine the quantum of costs, and there will be no further issues between them to produce yet further dispute. As I have said, those are compelling considerations. 54 In the circumstances, I have concluded that the appropriate costs order is that each party bear its own costs in the proceeding. I certify that the preceding fifty-four (54) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Stewart.

Evidence Act 1995(Cth)s 131(2)(h)

Federal Court Rules 2011(Cth)rr 25.14(1)-(2), 26.12(7)

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