Whitby v ZG Operations Australia Pty Ltd

THAWLEY J: 1 On 30 November 2018, these proceedings were dismissed: Whitby v ZG Operations Australia Pty Ltd [2018] FCA 1934. On 21 December 2018, a timetable and date for hearing was set to address a foreshadowed application in respect of costs. These reasons address the application for costs ultimately made by the respondents. 2 The corporate respondents, ZG Operations Australia Pty Limited and ZG Lighting Australia Pty Ltd, and Mr Dixon (the third respondent) applied for costs on an indemnity basis on and from 12 July 2018, the day after expiry of an offer made to settle the proceedings. This claim was based on s 570(2)(b) of the Fair Work Act 2009 (Cth) (FW Act). 3 Mr Dixon applied for costs of the whole proceedings on an indemnity basis. This claim, based on s 570(2)(a) of the FW Act, was made on the basis the proceedings had been instituted against Mr Dixon "without reasonable cause". 4 Mr Dixon made an alternative claim for costs from 19 September 2018, the day on which he advanced a no case submission at trial. This claim was based on s 570(2)(b) of the FW Act. It was said that the applicants unreasonably failed to discontinue the proceedings against Mr Dixon after he advanced (but not to conclusion) a no case submission.

Legislative regime 5 Section 570 provides: Costs only if proceedings instituted vexatiously etc. (1) A party to proceedings (including an appeal) in a court (including a court of a State or Territory) in relation to a matter arising under this Act may be ordered by the court to pay costs incurred by another party to the proceedings only in accordance with subsection (2) or section 569 or 569A. Note: The Commonwealth might be ordered to pay costs under section 569. A State or Territory might be ordered to pay costs under section 569A. (2) The party may be ordered to pay the costs only if: (a) the court is satisfied that the party instituted the proceedings vexatiously or without reasonable cause; or (b) the court is satisfied that the party's unreasonable act or omission caused the other party to incur the costs; or (c) the court is satisfied of both of the following: (i) the party unreasonably refused to participate in a matter before the FWC; (ii) the matter arose from the same facts as the proceedings. 6 Section 570 operates, at least so far as it affects proceedings in the Federal Court of Australia, to limit the discretion contained in s 43 of the Federal Court of Australia Act 1976 (Cth) (FCA Act) - see: Liu v Stephen Grubits and Associates [2019] FCAFC 24 at [10]. 7 Section 570(2)(a) directs attention to the point in time when proceedings were instituted: Morris v McConaghy Australia Pty Ltd [2018] FCA 2099. The test is whether the relevant party "instituted the proceedings vexatiously or without reasonable cause". 8 The applicants submitted: [6] The appropriate test in determining the proper application of s 570(2)(a), is what would have happened if the respondents had sought summary judgment under s 31A of the Federal Court of Australia Act 1976 (Cth) (Fair Work Ombudsman v Valuair Ltd (No 3) [2014] FCA 1182 at [14] (Buchanan J) and Re Nimmo, in the matter of an application for an inquiry relating to an election for an office in the Australian Education Union (NT Branch) (No 2) [2011] FCA 728 (Reeves J). [7] It follows (Re Nimmo at [30]) that the standards that apply to a summary judgment application (viz "so obviously untenable that it cannot possibly succeed", "manifestly groundless" or "discloses a case which the Court is satisfied cannot succeed") apply to the question for the Court under s 570(2)(a). 9 Determining what would have happened if an application for summary judgment had been made under s 31A of the FCA Act has the potential to distract attention away from the question that s 570(2)(a) requires to be answered. At worst, it risks supplanting the statutory test with a different one. The correct approach is to apply the words of the section. 10 The evident policy behind s 570(2)(a) is that, generally, parties are not at risk of having to pay costs; however, that protection should not apply where proceedings have been instituted vexatiously or without reasonable cause. What might constitute "reasonable cause" must be assessed by reference to the nature of the particular proceedings instituted. It is not asserted that the present proceedings were instituted "vexatiously". 11 Section 570(2)(b) directs attention to whether there was an "unreasonable act or omission" which "caused the other party to incur costs". Section 570(2)(b) frees parties from the risk of having to pay costs, but sets a limit by protecting parties from "unreasonable" conduct which causes an increase in costs. 12 There was no dispute between the parties that an unreasonable failure to accept an offer of compromise was capable of falling within s 570(2)(b). The word "unreasonable" must be read in the statutory context in which it is used. That context includes that the usual discretion as to costs in adversarial litigation has been narrowed. Costs in proceedings under the FW Act are only to be awarded in specific circumstances. This context is different to the situation in which Courts have considered the question whether costs should be ordered by reason of an unreasonable failure to accept offers to settle where the discretion to award costs is not restricted by a provision such as s 570 and where the usual rule is that costs follow the event. That different context must be borne in mind when considering the application of the general common law principles which have developed in relation to Calderbank offers.

The "Calderbank" Offer: section 570(2)(b) 13 On Friday, 6 July 2018 the respondents (then the corporate respondents, Mr Dixon and other individuals) wrote to the solicitors for the applicants (Mr Jamsek and Mr Whitby) offering to resolve the proceedings. The letter was in the following terms: 1. As you would be aware your client Mr Jamsek operated under partnership arrangement with our client from 1986 until the 14 January 2017 and that your client Mr Whitby also operated under a partnership arrangement with our clients from 1986 until at least 1 July 2012. This fact as well as the other indicia - we have set out in our defence and our draft statement of agreed facts and issues - provide strong grounds for our clients to assert that your clients were not common law employees and to successfully defend the Federal Court Proceedings. 2. Regardless of the above and in effort to avoid further disagreements and cost to all parties we have been instructed by our clients to make the following without prejudice offer to your clients Mr Whitby and Mr Jamsek in one last effort to resolve the Federal Court Proceedings: (a) That our clients will pay each of your clients the amount of $100,000.00 (inclusive of GST) either as a non-concessional superannuation payment or alternatively as a payment for damages subject to receipt of a tax invoice made payable to ZG Lighting Australia Pty Ltd within 21 days of receipt of an executed deed from both Mr Whitby and Mr Jamsek; (b) That your clients release and discharge our clients in relation to all claims in the Federal Court Proceedings and their period of engagement with our clients; (c) That your clients acknowledge that they or their agents are responsible for any taxation on the settlement amounts and will indemnify our clients in respect of such amounts of taxation payable on that sum (to ensure that any taxation liability of your clients are paid by them); (d) That the terms of the settlement remain confidential; (e) That each party will be responsible for their costs in relation to the deed and the Federal Court proceedings; and (f) That parties enter into a deed of settlement reflecting the above and that there is no agreement until such terms of the deed of settlement have been agreed upon by both parties. This offer will remain open for acceptance until 4.00pm 11 July 2018. Failing acceptance of the above offer we put your clients on notice that our clients will use this letter on the question of costs in the Federal Court proceedings in accordance with the rule in Calderbank v Calderbank [1975] 3 All ER 333. 14 There was no evidence to indicate when that letter was sent or received or how it was sent. I infer it was not sent by post given the time for acceptance. However, I would not infer it was received any lengthy time before close of business on Friday, 6 July 2018. 15 Even if the letter was communicated by attachment to email, as is not uncommon, and even if it was communicated to the solicitors for the applicants early on Friday, 6 July 2018, it would not have been unreasonable for the offer not to have been communicated to the applicants by their solicitors until Monday, 9 July 2018 or even later. As noted in the offer, it was open for acceptance only until Wednesday, 11 July 2018. 16 On communication of the offer, the applicants would have had a range of questions and a number of matters to consider, including: (1) what were the prospects of success in light of what was known at that point in the proceedings? (2) what were the costs of the applicants' solicitors which would need to be deducted from the offer of $100,000 inclusive of costs? (3) what were the advantages and disadvantages, including the taxation consequences, of taking the balance (after deduction of costs) of the amount of $100,000 as a non-concessional superannuation payment or a payment of damages invoiced as a supply? The taxation consequences were also relevant by reason of the indemnity referred to in para 2(c) of the letter. 17 In the circumstances of this case, the applicants' rejection of, or failure to accept, the offer was not shown to be, within the meaning of s 570(2)(b), an "unreasonable act or omission". The principal reason for that is that the time provided for consideration of the offer was likely to be insufficient for the applicants to obtain advice sufficient to understand fully the ultimate financial consequences of the offer and also therefore to weigh that consideration with any advice they received as to their prospects of success. 18 The offer was genuine and, in light of the ultimate result on the findings made, a good one. The facts which led to the ultimate conclusion that the applicants were not employees were largely known to the applicants and did not depend in any substantial way on the evidence or cross-examination of the respondents' witnesses. Nevertheless, whilst I consider the applicants' case that they were employees was difficult, it was not beyond argument. Further, recognising that the legal characterisation of whether a particular person is an employee or an independent contractor is not without difficulty, I do not conclude that the applicants either would or should have known that their case would not succeed. The first numbered paragraph of the Calderbank offer did not articulate clear reasons why the applicants would be unsuccessful, at least absent reference to the draft statement of agreed facts and issues (which was not in evidence) referred to in that paragraph. 19 The offer was not one which could be accepted as against certain respondents only. Accordingly, even if the applicants ought to have known that their respective cases against Mr Dixon enjoyed little or no prospect of success, the rejection or failure to accept the Calderbank offer enjoys no different result vis-à-vis him. 20 The applicants submitted that the offer was "not an offer capable of acceptance" by reason of para 2(f) of the Calderbank offer. Whether or not this is correct is in many ways beside the point. The point is that the offer was a genuine attempt to resolve the dispute. If it had been "accepted" by the applicants, it may have resulted in a specifically enforceable agreement, but it would most likely have led to the execution of a deed of settlement. An unreasonable failure to "accept" an offer containing a clause such as 2(f) or an unreasonable failure to respond to or engage with a genuine attempt to resolve litigation could, in principle, be an "unreasonable act or omission" for the purposes of s 570(2)(b). However, for the reasons given above, it was not in the circumstances of this case.

Mr Dixon's application for costs 21 As mentioned, s 570(2)(a) focusses upon the institution of proceedings rather than the conduct of the proceedings thereafter. 22 The case against Mr Dixon was that he was personally liable because he was, for the purposes of s 550(2)(c), "knowingly concerned" in contraventions by the corporate respondents of ss 44, 45 and 357 of the FW Act. It was common ground that the applicants had to establish that Mr Dixon was knowingly involved in the contraventions in the sense that he was a participant in them, with knowledge of the essential elements of the contravention.

Sections 44 and 45 claims 23 The claimed contraventions by the corporate respondents of ss 44 and 45 were constituted by alleged failures to pay certain employee entitlements. There could be no contravention if, as was ultimately found to be case, the applicants were not employees. 24 The applicants ultimately submitted, in the context of a no case submission advanced by Mr Dixon (and Mr Dick), that Mr Dixon knew that the applicants were employees rather than independent contractors. The "knowing involvement" or "practical connection" with the contravention was, so it was submitted, the failure to act or the allowing of the arrangements to continue despite the people with the authority to change the arrangements (which was said to include Mr Dixon) becoming aware of the truth of the arrangements: T135. That is, it was ultimately alleged that Mr Dixon was "knowingly concerned" because he knew the applicants were employees rather than independent contractors. There was no pleading to this effect. 25 The Amended Statement of Claim (ASOC), at para [2], contained an identification of certain facts which it was asserted Mr Dixon knew. In summary, these were facts concerning the historical arrangements between the relevant parties and what the applicants in fact did in performing their work, focussed particularly on those which might be thought to be indicative of an employment relationship. 26 It was then pleaded in para [5] of the ASOC: During the period about 2008 to about 2016, the fourth respondent (Mr Dixon): (a) was the Factory Warehouse or Logistics Manager of ZG Operations or ZG Lighting; (b) had day-to-day control over the work of the applicants, including rostering and work assignments; (c) was involved in about 2008 in negotiating, on behalf of ZG Operations or ZG Lighting, an increase in the applicants' hourly rate; (d) had knowledge of each of the matters particularised at E-T of paragraph [2]; (e) knew that the applicants were not paid payments due for annual leave (including leave loading), were not paid Modern Award entitlements (including overtime), were not paid for personal leave, were not paid for public holidays and that the ZG Operations or ZG Lighting did not make superannuation contributions on behalf of the applicants; (f) had the power and authority within ZG Operations or ZG Lighting to determine or assist in determining the basis on which the applicants were engaged by ZG Operations or ZG Lighting; (g) took no reasonable steps to ensure that the applicants were paid the entitlements in (e). 27 At para [32], it was pleaded that Mr Dixon was "knowingly concerned in or party to the contraventions" by reason of having the knowledge identified earlier, namely at subparas (d) and (e) of para [5] of the ASOC. 28 Knowledge that the applicants performed their work in a particular way and were not paid as employees, whilst clearly relevant to the question, does not equate to knowledge that the applicants were, in truth, employees. Mr Dixon may have thought that the applicants were independent contractors, being what the applicants were ultimately determined to be. 29 A pleading that a person is "knowingly concerned" in a contravention is a serious one, akin to a pleading of dishonesty - see: Stefanovski v Digital Central Australia (Assets) Pty Ltd [2018] FCAFC 31 at [70]. A pleading that a person was knowingly concerned in a contravention, exposing them to personal liability and seeking the imposition of civil penalties, should be drafted with some considerable care. It should plead the material facts said to establish that the person was knowingly concerned in the contravention. This includes an express identification of the elements of the contravention and an express pleading that the person had knowledge of each of the essential elements constituting the contravention. It should identify the material facts said to establish knowledge or from which such knowledge is to be inferred. The pleading should generally also identify the material facts said to constitute the relevant acts or omissions of the person which are relied upon as establishing any practical connection with or link to the contraventions (Whitby at [234], [235]) which are contended to establish the person was "knowingly concerned" within the meaning of s 550(2)(c). 30 In its application to the present circumstances, if the applicants' case when instituted was based on the notion that Mr Dixon knew that the applicants were employees, that allegation should have been made expressly in the pleading together with the material facts relied upon as establishing that Mr Dixon had that knowledge or from which such knowledge should have been inferred. If that had occurred, attention would necessarily have been directed to whether the claim was a reasonable one to make and whether the material or evidence available or likely to be available (assessed in accordance with s 140 of the Evidence Act 1995 (Cth) and Briginshaw v Briginshaw (1938) 60 CLR 336) permitted the pleading of the relevant material facts and provided reasonable cause to institute the proceedings. 31 If the claim of knowledge that the applicants were in truth employees rested largely or entirely on the fact that Mr Dixon knew what the applicants did in the course of their work, the question would naturally have arisen whether that provided reasonable cause, in the circumstances of the case, to plead that he was "knowingly concerned" in contraventions of the FW Act. 32 It is one thing to assert a person had actual knowledge that an arrangement constituted an employment arrangement if, for example, armed with knowledge of the relevant facts, the person had sought and received advice from another person with expertise in the field, or if they themselves had sufficient experience in the field. It is another to assert that a person knew that arrangements constituted employment arrangements simply because they knew what the parties did in the performance of their work. Clearly there are cases where the circumstances of the parties of themselves so obviously give rise to the conclusion that the relationship is one of employment that it could be inferred that a person familiar with the arrangements knew an employment relationship existed. The present case is not an example of that situation. Even if it were such a case, it would have been desirable, if not necessary, for the applicants to plead that Mr Dixon's knowledge that the applicants were, in truth, employees was to be inferred on the basis that such a conclusion was obvious from identified facts known to Mr Dixon and in light of his experience. Such a pleading would have directed attention to whether there was reasonable cause to institute proceedings on that basis. 33 The applicants had performed their delivery work for the relevant companies, with trucks owned by them or their partnerships, for over 20 years before Mr Dixon commenced as Supply Chain Manager on 31 March 2008. It may be accepted that, from the time he commenced employment with the companies, he knew what the applicants did. Many employees of the corporate respondents were also aware of the underlying facts to differing degrees. Mr Dixon was aware of the circumstances in which the applicants' work was performed. For example, he knew that the applicants or their partnerships owned their own trucks, which for at least some of the time bore branding of the relevant companies. He knew that they performed delivery and other activities, including the sale of pallets to the companies. He knew that the applicants chose what trucks they would purchase or lease to carry out their work and that, as part of their activities, they paid all of the substantial expenses of operating those vehicles. He knew that the applicants invoiced the relevant company for the supplies made, charging GST in respect of their supplies. He knew that the applicants were engaged to perform their work and supply their trucks under written contracts which identified their partnerships as the contracting parties. He knew that the corporate respondents treated the applicants as independent contractors. These matters do not lead inexorably or even obviously to a conclusion that the applicants were employees, less still that Mr Dixon knew that, in truth, they were employees. 34 As mentioned, the first time the applicants expressly articulated that the case against the respondent individuals, including Mr Dixon, included that they had knowledge that, in truth, the applicants were employees was during argument at the hearing in relation to the respondents' no case submission, which was ultimately not pursued. Although that proposition was put in argument at that time (shortly before Mr Dixon gave evidence) it was not put to Mr Dixon in cross-examination. If the no case submission had not been made, then this part of the case against Mr Dixon may only have become express in closing submissions. 35 During oral submissions on the application for costs, the applicants put their case as being that Mr Dixon knew the underlying facts in terms of what the applicants in fact did and that, knowing those facts, he failed to make any inquiry about whether they were employees. The failure to inquire was said to be a "suspicious circumstance" from which it should be inferred that he had actual knowledge that the applicants were in fact employees - see: EZY Accounting 123 Pty Ltd v Fair Work Ombudsman [2018] FCAFC 134 at [12]. The applicants disavowed any other "suspicious circumstance". The applicants submitted: "it is not an unreasonable way to put the case that Mr Dixon had knowledge of a series of matters which the applicants considered at the time of commencing their proceedings sufficiently strong to put Mr Dixon on notice he should make an inquiry". That case was not pleaded. 36 In any event, when the applicants instituted the proceedings, the applicants knew more than the specific factual matters which they pleaded as pointing to an employment relationship. When they instituted the proceedings, they also knew all of the facts which pointed against the relationship being one of employment and towards the partnerships (in later years, Mr Whitby as a sole trader) operating as independent contractors conducting their own businesses: owning trucks, claiming deductions, invoicing supplies and so on. I am satisfied that the respondents have established that the proceedings were instituted against Mr Dixon "without reasonable cause". There was no real prospect of establishing that Mr Dixon knew the applicants were, in truth, employees on any of the bases identified by the appellants after the proceedings were instituted. In particular, even assuming this was the basis upon which the ASOC was drafted, it was not reasonable, in the circumstances of this case, to institute proceedings alleging that Mr Dixon was "knowingly concerned" in contraventions on the basis that he knew the relevant facts and failed to make an inquiry. 37 If the applicants had pleaded that Mr Dixon knew the applicants were employees and that this knowledge was to be inferred from his failure to make an inquiry in light of the facts known to him, then it may well, and in my view on the basis of the available material should, have become apparent that proceedings alleging knowing involvement in FW Act contraventions were being instituted against Mr Dixon without reasonable cause. 38 The applicants did not seek to adduce evidence on the application for costs concerning material known to them at the time of institution of proceedings from which it might be inferred that, when the proceedings were instituted, there was reasonable cause to believe Mr Dixon knew the applicants were, in truth, employees. The argument proceeded largely by reference to the pleadings and the evidence adduced at trial. Of course, inferences can be drawn as to what the applicants knew at the time the proceedings were instituted. Further, it is the respondents who bear the onus of establishing that s 570(2)(a) is engaged on the basis that the proceedings were instituted without reasonable cause, not for the applicants to establish that there was reasonable cause. 39 The applicants did not direct my attention to material apart from the pleadings and evidence at trial which was said to be relevant to establishing what "cause" the applicants had to institute proceedings against Mr Dixon seeking civil penalties and alleging he was knowingly concerned in the contraventions. In oral argument, my attention was drawn to the applicants' closing written submissions (at [115]) which had identified evidence adduced at trial which was said to be relevant to the practical connection between Mr Dixon's conduct (or omissions) and the contraventions and which was said to indicate that he was a decision-maker. To the extent these matters of fact differ from or add to the facts pleaded, they do not take the matter further in terms of whether there was reasonable cause for instituting the proceedings against Mr Dixon.

Section 357 claim 40 The claim under s 357 of the FW Act was that the corporate respondents, in putting to the applicants in 2001 a contract which identified them as independent contractors, misrepresented to the applicants that they would be performing their work as independent contractors rather than employees. Section 357 came into force on 1 June 2009. Mr Dixon commenced work on 31 March 2008. The corporate respondents could not have contravened, in 2001, a provision which did not then exist and which did not operate retrospectively. Mr Dixon could not have been involved in any contravention in 2001, he not having commenced employment. 41 Accordingly, the case against Mr Dixon required the applicants to show that there was a "continuing representation" generated by the 2001 contract amounting to a contravention of s 357 with which Mr Dixon was "knowingly concerned" for the purposes of s 550(2)(c) from some time after he commenced employment in 2008. 42 Apart from what has been referred to above, the ASOC did not identify what material facts were relied upon as establishing that Mr Dixon was "knowingly concerned" in the alleged contravention of s 357. It has remained obscure how Mr Dixon is said to have had any practical connection with a "continuing representation" constituted by a contract entered into in 2001 remaining on foot. It was pleaded that Mr Dixon took no reasonable step to ensure the applicants were paid certain amounts to which they were entitled if they were employees. If the knowing involvement was that Mr Dixon knew the applicants were employees and was involved in persisting with a course of conduct which misrepresented to them that they were independent contractors (perhaps a failure to advise them they were, in truth, employees), this matter was not pleaded. I am satisfied for the reasons given above that such a claim was instituted without reasonable cause. It had no reasonable prospect of succeeding.

Indemnity costs 43 As mentioned, Mr Dixon sought costs on an indemnity basis. Once one of the circumstances identified in s 570(2) is satisfied, the power to order costs is in the discretion of the Court: Ashby v Slipper (No 2) (2014) 314 ALR 84 at [7]. The context, even once the Court's discretion is enlivened, is that the costs are being awarded in respect of proceedings under the FW Act. The context here also included that civil penalties had been sought against Mr Dixon on the basis of his alleged knowing involvement in the alleged contraventions. This is a matter which goes to whether the proceedings were instituted without reasonable cause because what is reasonable must be assessed in relation to the nature of the proceedings instituted. The nature of the proceedings is also relevant to the discretion to award costs on the indemnity basis, which arises if one of the circumstances identified in s 570(2) has been established. No doubt the pleading of the case against Mr Dixon and others, and the seeking of civil penalties, caused considerable pressure and anxiety. 44 There are differing degrees of conduct or failures from which a conclusion might be made that the proceedings were brought without reasonable cause. Whilst I have concluded that the proceedings were instituted against Mr Dixon without reasonable cause, I have concluded - with some hesitation - that the circumstances were not such that the award of costs should be on the indemnity basis. 45 My hesitation is caused principally by the consideration that, if allegations of knowing involvement are to be made against individuals and if civil penalties are to be sought, then the cases against them should be properly and carefully pleaded. This promotes, especially when the pleading must be endorsed as containing allegations which it is proper to make on the basis of the available factual and legal material, careful consideration to whether there is reasonable cause for bringing a case making serious allegations of the kind involved in a claim a person was "knowingly concerned" in a contravention of the FW Act. 46 Given my conclusion that the proceedings against Mr Dixon were instituted without reasonable cause, it is not strictly necessary to decide whether I would, alternatively, have awarded costs from the time of the no case submission. The no case submission was made on the second day of the hearing which was listed for three days. The application was withdrawn, the context being that, after some argument, it became apparent that continuing and then determining the no case submission might cause the parties significant additional expense and delay. I would not have concluded that continuation of the case against Mr Dixon was unreasonable within the meaning of s 570(2)(b) on the basis only of the applicants having heard the matters raised in support of the no case submission, particularly in circumstances where the proceedings were likely to be substantially concluded the next day.

CONCLUSION 47 The applicants should pay the costs of the third respondent on the ordinary basis. I certify that the preceding forty-seven (47) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Thawley.