The Good Living Company Pty Limited ATF the Warren Duncan Trust No 3 v Kingsmede Pty Ltd

MARKOVIC J: 1 On 20 December 2019 I made orders in this proceeding including orders dismissing paragraph 1 of the originating application filed by the applicants, granting leave to the parties to file and serve submissions on the question of costs of the proceeding and that, in the absence of a request for an oral hearing by any of the parties, the issue of costs of the proceeding would be determined on the papers: see The Good Living Company Pty Limited ATF the Warren Duncan Trust No 3 v Kingsmede Pty Ltd [2019] FCA 2170. 2 The parties have now filed submissions in accordance with the Court's orders. None of the parties requested that there be an oral hearing such that the issue of costs of the proceeding can be determined on the papers: see s 20A of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act). 3 The respondents submit that the following orders should be made in relation to costs: 1. Subject to order (2), the Applicants pay the respondents' costs on the party/party basis, as agreed or assessed. 2. The Applicants pay the respondents' costs on the indemnity basis from 11 am on the second business day following [19 January or 27 February 2018], as agreed or assessed. 4 The applicants seek an order that they pay the respondents' costs of the proceeding on a party/party basis and oppose the making of an order for costs on an indemnity basis. 5 The effect of the first order made on 20 December 2019 was that the applicants were unsuccessful in the proceeding and the respondents were, in effect, the successful party. There is no dispute between the parties that, having been unsuccessful in the proceeding, the applicants should pay the respondents' costs. The issue that arises is whether any part of those costs should be paid on an indemnity basis.

The parties' submissions 6 The respondents submit that they are entitled to an order in terms of proposed order 2 set out at [3] above because they made two offers to the applicants to settle the proceeding: (1) by letter dated 19 January 2018 they made a Calderbank offer which included a term that the respondents would pay the applicants the sum of $50,000 inclusive of costs and any GST (19 January Offer); and (2) they served a notice of offer to compromise under Pt 25 of the Federal Court Rules 2011 (Cth) (Rules) dated 27 February 2018 by which, among other things, the respondents offered to pay the applicants $1,000 inclusive of costs (Offer of Compromise). 7 The respondents submit that the applicants unreasonably failed to accept either offer. They submit that their defence was served on 19 January 2018 and that, as the 19 January Offer was open for 14 days, there was sufficient time for the applicants to consider their defence. The respondents further submit that, by the time of the Offer of Compromise, the defence had been available to the applicants for one month. 8 The respondents submit that their defence alerted the applicants to the following technical matters which proved fatal to the applicants' claim: (1) the applicants were not under any "special disadvantage" which substantially weakened any general law unconscionability claim and thus undermined the claim made pursuant to s 20 of the Australian Consumer Law being Sch 2 to the Competition and Consumer Act 2010 (Cth) (ACL); (2) the claim under s 21 of the ACL was wholly unavailable relying on Monroe Topple & Associates Pty Ltd v Institute of Chartered Accountants in Australia (2002) 122 FCR 110; and (3) the applicants were the wrong plaintiffs more generally and the proper plaintiff was the tenant. 9 The respondents contend that the offers each contained a fair element of compromise, noting that even the Offer of Compromise contained a major compromise being that it did not require the applicants to pay costs. They also say that the amount at stake was modest. 10 The respondents submit in summary that the applicants' case was hampered by legal issues to which the applicants were alerted by the defence, the costs of the proceeding were going to be high relative to the amount of their claim and in the 19 January Offer the applicants were to be paid $50,000 while in the Offer of Compromise the applicants were given the opportunity to withdraw with no obligation to pay costs. 11 The respondents submit that the refusal to accept either of the offers in the circumstances was highly imprudent and plainly unreasonable and that indemnity costs should follow. 12 The applicants submit that it is not possible to compare readily the terms of the 19 January Offer with the outcome the applicants achieved in the litigation and to identify which represents a more favourable result from the applicants' perspective. The applicants note that the 19 January Offer is subject to conditions and releases while the judgment is not accompanied by such conditions or releases. They contend that, by the judgment, the respondents have not bettered the 19 January Offer. 13 The applicants also submit that, in any event, it was not unreasonable for them to reject both the 19 January Offer and the Offer of Compromise having regard to the circumstances as they existed at the relevant time and the following factors: (1) the stage of the proceeding at which the offers were received when interlocutory steps had not occurred and evidence had not been filed; (2) the time allowed for the applicants to consider the offers noting that both offers were only open for 14 days which was not adequate time to permit them to consider the offers, particularly in circumstances where neither offer was accompanied by an explanation as to why the respondents maintained the application would fail and the trial date had not been fixed; (3) the extent of the compromise offered. The applicants contend that the Offer of Compromise was effectively a "walk away" offer and that, although it proposed that the parties bear their own costs, this did not involve any real element of compromise given the offer was made at a stage of the proceeding when none of the parties would have incurred significant costs; (4) the applicants' prospects of success as at the date of the offers. The applicants submit that at that early stage they were of the view that their proceeding had reasonable prospects of success and they did not have the benefit of the respondents' evidence or written submissions; (5) the clarity with which the terms of the offers were expressed. The applicants say that the conditions applicable to the 19 January Offer meant that they could not readily compare the monetary amount in the offer and the relief they sought; and (6) whether the offers foreshadowed an application for indemnity costs. The applicants submit that, while the 19 January Offer does, the Offer of Compromise does not because the email attaching it was marked "without prejudice" and was not marked "save as to costs".

Relevant principles 14 Section 43 of the Federal Court Act confers a wide discretion on the Court in awarding costs, which is to be exercised judicially. Among other things, s 43(3) permits the Court or a judge to make different awards of costs in relation to different parts of the proceeding or to order that costs awarded against a party be assessed on an indemnity basis or otherwise (see subss (b) and (g)). 15 Part 25 of the Rules concerns offers to settle. Rule 25.01(1) provides that a party may make an offer to compromise by serving a notice, in accordance with Form 45, on another party. Rule 25.03 prescribes the content of an offer to compromise and requires that it must state whether the offer is inclusive of costs or if costs are in addition to the offer. 16 Rule 25.05 concerns the timing of any offer and provides as follows: (1) An offer may be made at any time before judgment is given. (2) A party may make more than one offer. (3) An offer may be limited in time for which it is open to be accepted, however the time must not be less than 14 days after the offer is made. (4) Unless the notice provides otherwise, an offer is taken to have been made without prejudice. 17 Rule 25.14 sets out the costs consequences where an offer made in accordance with the Rules is not accepted. It relevantly provides: (2) If an offer is made by a respondent and an applicant unreasonably fails to accept the offer and the applicant's proceeding is dismissed, the respondent is entitled to an order that the applicant pay the respondent's costs: (a) before 11.00 am on the second business day after the offer was served - on a party and party basis; and (b) after the time mentioned in paragraph (a) - on an indemnity basis. 18 In Mount Isa Mines Ltd v The Ship "Thor Commander" (No 2) [2018] FCA 1702 at [9]-[14] Rares J conveniently summarised a number of authorities concerning the circumstances in which an offeree, who fails to accept a settlement offer of compromise made outside Pt 25 of the Rules, will be liable to pay costs on an indemnity basis as follows: 9 The Full Court has discussed the principles applicable to determine, at common law, whether an offeree who fails to accept an offer of settlement will be liable to pay costs thereafter on an indemnity basis. Different Full Courts have stated the test as that the rejection of the offer must be either "imprudent or unreasonable" or "imprudent or plainly unreasonable" in order to enliven the discretion to award costs on an indemnity basis. This difference in expression, while unfortunate, does not appear to be substantive. In Dukemaster Pty Ltd v Bluehive Pty Ltd [2003] FCAFC 1 at [7], Sundberg and Emmett JJ said: The mere making of an offer of compromise and its non-acceptance, followed by a result more favourable to the offeror, does not automatically lead to an order for payment of costs on an indemnity basis: John S Hayes & Associates Pty Ltd v Kimberley-Clark Australia Pty Ltd (1994) 52 FCR 201 at 204-206; MGICA (1992) Pty Ltd v Kenny & Good Pty Ltd (No 2) (1996) 70 FCR 236 at 239. The applicant for a more generous award must show that the rejection of the offer was imprudent or plainly unreasonable: NMFM Property Pty Ltd v Citibank Ltd (No 2) ("NMFM") (2001) 109 FCR 77 at 98; Australian Competition & Consumer Commission v Australian Safeway Stores Pty Ltd (No 3) [2002] FCA 1294 at [28]; Sydney Markets Ltd v Sydney Flower Market Pty Ltd [2002] FCA 283 at [16]-[17] and [23]. (emphasis added) 10 They added (at [8]) that this position was unlike that applicable to the service of an offer of compromise under an analogue of what is now Pt 25 of the Federal Court Rules 2011. They said that the offer must be a reasonable one and ordinarily should contain a statement of the reasons that the offeror maintains why the offeree's case would fail. 11 The authorities do not lay down an inflexible rule, that some detailed reasoned explanation need be given, to justify the exercise of what is, after all, a judicial discretion to make an order for costs on a basis different to the ordinary party-party basis. That is particularly so in circumstances such as the ones that obtain here, where each party, on the eve of the trial, had engaged in an ongoing mediation that remained alive, as the letters rejecting the offer and making the counter-offer demonstrated, and each had provided the other with substance of its evidence-in-chief and its detailed opening submissions that drew, quite clearly, the battle lines between them. 12 In my opinion, the preponderance of authority in the Full Court, to the extent that the word "plainly", as a qualification to "unreasonable", may be thought to affect the test, is that set out in the reasons of Nicholas, Yates and Beach JJ in Anchorage Capital Partners Pty Limited v ACPA Pty Ltd (No 2) [2018] FCAFC 112 at [6]-[8], namely: [6] A well-established circumstance justifying an award of indemnity costs is an imprudent refusal of an offer to compromise (Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 at 233 per Sheppard J). In such cases, a key question is whether the offeree's refusal of the offer was "unreasonable" when viewed in light of the circumstances existing at the time the offer was rejected (Black v Lipovac & Ors (1998) 217 ALR 386 at 432 per Miles, Heerey and Madgwick JJ; CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Ltd [2008] FCAFC 173 at [75] per Moore, Finn and Jessup JJ). [7] The circumstances to be taken into account in determining whether rejection of an offer was "unreasonable" cannot be stated exhaustively but may include, for example: (a) the stage of the proceeding at which the offer was received; (b) the time allowed to the offeree to consider the offer; (c) the extent of the compromise offered; (d) the offeree's prospects of success, assessed as at the date of the offer; (e) the clarity with which the terms of the offer were expressed; and (f) whether the offer foreshadowed an application for an indemnity costs in the event of the offeree rejecting it. (Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435 at [25] per Warren CJ, Maxwell P and Harper AJA; Beling v Sixty International S.A. (No 2) [2015] FCA 355 at [25] per Mortimer J). [8] An unsuccessful party is not liable to pay indemnity costs merely because it received an offer to settle on terms more favourable than it achieved at trial and rejected that offer (CGU Insurance at [75]; Black at [217]-[218]). As we observed in the Appeal Reasons, albeit in the context of r 25.14(2) of the FCRs, assessment of the "unreasonableness" of an offeree's refusal of a settlement offer is a broad-ranging inquiry that is not restricted to consideration of the extent or quantum of the compromise offered. 13 And, in Insight SRC IP Holdings Pty Ltd v Australian Council for Educational Research Ltd (No 2) [2013] FCAFC 73 at [7]-[9], North, Rares and Robertson JJ approved what Moore, Finn and Jessup JJ had said in CGU Insurance Limited v Corrections Corporation of Australia Staff Superannuation Pty Ltd (2008) ANZ Insurance Cases 61-785, [2008] FCAFC 173 at [75], namely: [7] In his reasons in Uniline Australia Ltd v S Briggs Pty Ltd (No 2) (2009) 82 IPR 56 at 65-66 [38], which were approved by Besanko, Perram and Katzmann JJ in Sagacious Legal Pty Ltd v Wesfarmers General Insurance Ltd [2011] FCAFC 53 at [131]-[132], Greenwood J said: "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." (emphasis in original) [8] In the case of a Calderbank offer (cf: Calderbank v Calderbank [1976] Fam 93), Moore, Finn and Jessup JJ said in CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Ltd (2008) 15 ANZ Insurance Cases 61-785; [2008] FCAFC 173 at [75]: "From the tenor of claims which have come before the court in recent years, there appears to be a view abroad that the failure of a party who has rejected a Calderbank offer ultimately to achieve a better outcome than provided for in the offer leads to a presumptive entitlement to indemnity costs with respect to the period subsequent to the offer. Such a view would be mistaken. Where a moving party (including a cross-claimant) offers to settle for a sum which is less than he or she eventually achieves at trial, there is a presumptive entitlement to indemnity costs under O 23 r 11(4) of the Federal Court Rules. However, where recourse is not had to the O 23, but reliance is placed upon the court's general discretion, it is necessary for the party seeking indemnity costs to demonstrate that the other party's refusal of the Calderbank offer was unreasonable: Black v Lipovac (1998) 217 ALR 386, 432; Maniotis v JH Lever & Co Pty Ltd (No 2) [2006] FCAFC 28. It is not sufficient that the offer was a reasonable one: Alpine Hardwoods (Aust) Pty Ltd v Hardys Pty Ltd (No 2) (2002) 190 ALR 121, 128 [35]; Dais Studio Pty Ltd v Bullet Creative Pty Ltd [2008] FCA 42, [11]. In considering this question in a particular case, the matter of unreasonableness will be judged by reference to the circumstances facing the offeree at the time of the offer. While the eventual outcome in the case may go part of the way in this regard, there is no presumption that ultimate success in the proceeding for the offeror necessarily renders the offeree's rejection unreasonable." (emphasis added) [9] In our opinion, those principles are apposite in a case such as the present where the offer was made in an open, rather than without prejudice, communication. It was unreasonable of ACER to have caused Insight Holdings and Insight to deal with the issues ACER raised in its answering submissions on the appeal. While the issue of quantification had some difficulties, the likelihood was that the appeal would result in substantial damages in the order of Insight's loss as found by the primary judge. 14 And in Keays v J P Morgan Administrative Services Australia Limited (No 2) [2011] FCA 574 at [7]-[20], Buchanan J discussed the authorities and ultimately came to the same conclusion as I, being that the test is whether the offeror is able to demonstrate that the rejection of its offer was imprudent or unreasonable, unqualified by the word "plainly". (Original emphasis.)

Consideration 19 The first issue raised by the applicants is that by the judgment the respondents have not bettered the 19 January Offer. I understand by that submission that the applicants suggest the result they achieved by the judgment was more favourable than the 19 January Offer. 20 By the 19 January Offer the respondents offered to settle the proceeding, without admission by any party, by: (1) the parties filing orders that the proceeding be dismissed with each party to pay its own costs; (2) the applicants and their directors providing releases and indemnities in relation to any "Claim" as defined in connection with the subject matter of the proceeding; (3) the respondents paying the applicants $50,000 inclusive of costs and any GST within 28 days of the dismissal of the proceeding in accordance with the proposed orders set out at subpara (1) above; and (4) the applicants warranting to the respondents that they had not assigned any "Claim" as defined in connection with the subject matter of the proceeding. 21 The 19 January Offer was open for acceptance for 14 days after its service, was expressed to be without prejudice save as to costs and specified that, if ultimately appropriate, the respondents would rely on the Calderbank principles to seek their costs on a solicitor-client basis. 22 By the judgment the applicants did not obtain the relief they sought and the proceeding was dismissed. Having failed in the proceeding, at the very least, as they concede, the applicants will be liable for the respondents' costs on a party/party basis. Although the 19 January Offer included the requirement for a release and indemnity for any "Claim" in connection with the subject matter of the proceeding, by that offer the respondents proposed a payment of $50,000 at an early stage of the proceeding, presumably before significant costs had been incurred, and that the proceeding be dismissed with each party paying its own costs. It is difficult, in the circumstances, to see how the applicants have achieved a better outcome by the judgment. They have not only failed to achieve any recovery but are liable to pay the respondents' costs on a basis to be determined. While the release and indemnity is in relation to any "Claim", which is broadly defined, it is conditioned by the requirement that the "Claim" be in connection with the subject matter of the proceeding. That being so I do not accept that the applicants achieved a better result by the judgment than they would have had they accepted the 19 January Offer. The applicants do not raise the same issue vis a vis the Offer of Compromise. 23 The next issue, which is central to the resolution of the question of the basis upon which the costs order should be made, is whether it was unreasonable for the applicants to reject the 19 January Offer and the Offer of Compromise. Whether that is so must be assessed having regard to the circumstances that existed at the time those offers were made. Given the proximity with which the offers were made, the circumstances faced by the applicants were substantially the same for each offer. As observed by a Full Court of this Court in Anchorage Capital Partners Pty Limited v ACPA Pty Ltd (No 2) [2018] FCAFC 112 at [8] the inquiry is a broad ranging one and "is not restricted to consideration of the extent or quantum of the compromise offered". That is so for the purposes of r 25.14(2) of the Rules and for a Calderbank offer. 24 This proceeding was commenced by way of the filing of an originating application and statement of claim on 22 December 2017. The respondents filed their defence on 19 January 2018, the same date as the 19 January Offer and about five weeks prior to the Offer of Compromise. At that stage none of the parties had filed any evidence. The matter was in its very early stages. 25 The 19 January Offer and the Offer of Compromise each stipulated a 14 day period for acceptance. Neither of those offers set out why it was that the respondents were of the opinion that the applicants would fail. There was no evidence before me that any discussions had taken place or of any more substantive correspondence that may have passed between the parties setting out the respondents' views or amplifying their defences. True it is that the applicants had the benefit of the defence which, as the respondents submit, set out the "technical matters" on which ultimately the applicants failed. But, given the early stage of the proceeding it is not possible to conclude that the applicants could have known that their case would or was likely to fail on those issues. 26 As I have already observed, the applicants did not have the benefit of any explication or the submissions and arguments that were ultimately put in relation to those matters and had only a limited time in which to consider the issues that were raised in the defence vis a vis the offers. While some of the matters raised by way of the defence were "technical" in nature, they were matters of sufficient complexity as to require some detailed consideration. At that stage and, based on the available material, the applicants were entitled to maintain their view that the proceeding had reasonable prospects of success. 27 In the context of considering whether the applicants' rejections of the offers were reasonable, an issue arises as to whether the Offer of Compromise involved any compromise at all. The respondents submit that it involved a fair element of compromise because it did not require the applicants to pay costs. The Offer of Compromise was in effect a "walk away" offer. In Barnes v Forty Two International Pty Limited (No 2) [2015] FCAFC 19 (Barnes) a Full Court of this Court said at [18]: We accept that "walk away" offers can be the proper subject of a Calderbank offer or an offer of compromise under r 25.01 (see Sagacious Legal Pty Ltd v Wesfarmers General Insurance Ltd [2011] FCAFC 53 at [130]-[132] per Besanko, Perram and Katzmann JJ; Clark v Federal Commissioner of Taxation (2010) 222 FCR 102 at [90]-[92] per Greenwood J; Uniline Australia Ltd v SBriggs Pty Ltd (No 2) (2009) 82 IPR 56; [2009] FCA 920 at [38] per Greenwood J). In the present case, for the appellants to offer to "walk away" with each party bearing their own costs involved a substantial element of compromise in forgoing a potential entitlement to recover the substantial costs that had been incurred to the date of the relevant offer (or thereabouts) by the appellants. The Barnes' affidavit setting out the costs incurred (albeit solicitor/client) up to November 2012 indicates that, even taking a substantial percentage thereof on a party/party basis, something of significant value was offered to be given up. It is also to be remembered that the offers were made close to trial, when significant costs had already been incurred. There is little doubt that each offer involved a genuine element of compromise. 28 Here, there was no evidence of the costs that the respondents had incurred as at the date of the Offer of Compromise. I would infer that, given that the proceeding was relatively nascent at that time, those costs were not significant. It is difficult to see how in this case, in contrast to the position found to be the case in Barnes, something of value was being forgone by the respondents in making the Offer of Compromise. In those circumstances the Offer of Compromise did not in my opinion involve any real element of compromise. 29 Having regard to the circumstances which existed at the time I am not satisfied that the applicants' refusals of the 19 January Offer and the Offer of Compromise were unreasonable. That being so I would not make an order that any part of the costs payable by the applicants should be paid on an indemnity basis.

Conclusion 30 I will make an order that the applicants pay the respondents' costs of the proceeding on a party/party basis as agreed or taxed. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Markovic.