Lamesa Holdings BV v Commissioner of Taxation [1997] FCA 375

CATCHWORDS COSTS - indemnity or party and party - s 43 of the Federal Court Act – whether there is or should be a 'usual rule' in respect of costs - issue maintained until immediately prior to hearing and then abandoned - abandonment of issue as basis for indemnity costs - consideration of motivation for abandonment - prosecution of issues without merit Federal Court of Australia Act 1976 (Cth) s 43 Federal Court Rules Order 62 Rule 4 Colgate-Palmolive Co v Cussons Pty Ltd [1993] 46 FCR 225 Re Sanchez Ex parte Smits [1994] 49 FCR 326 Henderson & Ors v Amadio & Ors (Heerey J, unreported, Federal Court of Victoria, 22 March 1996) Marks v GIO[1996] 137 ALR 579 Cachia v Hanes [1991] 23 NSWLR 304 Seavision Investment SA v Everett [1992] 2 Lloyds Rep 260 LAMESA HOLDINGS BV -v- COMMISSIONER OF TAXATION No. NG648 of 1996 EINFELD J SYDNEY 12 MAY 1997

IN THE FEDERAL COURT OF AUSTRALIA) NEW SOUTH WALES DISTRICT REGISTRY) No. NG648 of 1996 GENERAL DIVISION ) Between: LAMESA HOLDINGS BV Applicant And: COMMISSIONER OF TAXATION Respondent MINUTE OF ORDERS The Court orders that: 1. The costs of the applicant applicable or pertaining to the Article 7 issue be paid by the respondent on a party and party basis. Note: Settlement and entry of orders are dealt with in accordance with Order 36 of the Federal Court Rules. EINFELD J SYDNEY 12 MAY 1997

IN THE FEDERAL COURT OF AUSTRALIA) NEW SOUTH WALES DISTRICT REGISTRY) No. NG648 of 1996 GENERAL DIVISION ) Between: LAMESA HOLDINGS BV Applicant And: COMMISSIONER OF TAXATION Respondent EINFELD J SYDNEY 12 MAY 1997

REASONS FOR JUDGMENT Introduction Judgment in this matter was delivered on 4 March 1997. There remains to be resolved only the question of costs with respect to an aspect of the respondent's case which was pleaded but abandoned immediately prior to the hearing. The applicant is seeking an order that its costs of and pertaining to this issue be paid by the respondent on an indemnity or solicitor and client basis. The respondent opposes such an order. Background The applicant, Lamesa Holdings BV (Lamesa), is a company incorporated in the Netherlands. It appealed against two amended assessments issued by the Commissioner of Taxation (the respondent) for the years of income ended June 30 1994 and June 30 1996 respectively. These amended assessments purported to include in Lamesa's assessable income profits from the sale of shares in an Australian company. It submitted that the profits from the sale of the shares were excluded from Australian tax by virtue of section 4 of the International Tax Agreements Act 1953 and the 1976 Netherlands-Australia Double Taxation Agreement (Netherlands DTA). Article 7 of the Netherlands DTA provides that the profits of a Netherlands enterprise are taxable only in the Netherlands unless the enterprise carries on business in Australia through a permanent establishment situated here. Article 13 of the Netherlands DTA provides an exception to Article 7 where the income is derived from an alienation of real property. There were two substantive issues which arose from these Articles. The first was whether Lamesa had a permanent establishment in Australia (the Article 7 issue). The second was whether the Article 13 exception applied in respect of the sale of shares (the Article 13 issue). The Article 7 issue was not pursued by the respondent at the hearing and the Article 13 issue was therefore the only substantive matter argued. As the judgment in the matter showed, to give effect to the resolution of the Article 13 issue in favour of Lamesa, I ordered that its objections to the amended assessments be allowed in full and declared that no tax was payable in respect of the two income years in question. I ordered that the respondent pay Lamesa's costs in respect of the Article 13 issue on a party/party basis and that any submissions on Lamesa's claim for indemnity costs of the Article 7 issue should be made in writing within 28 days of the judgment being delivered. Those submissions have now been provided. The law The Court's jurisdiction to award costs arises from section 43 of the Federal Court of Australia Act 1976 (Cth), and the details are provided for in Order 62 of the Federal Court Rules. Section 43 provides: (1) Subject to subsection (1A), the Court or a Judge has jurisdiction to award costs in all proceedings before the Court (including proceedings dismissed for want of jurisdiction) other than proceedings in respect of which any other Act provides that costs shall not be awarded. Order 62 rule 4(2) states: (2) Where the Court orders that costs be paid to any person, the Court may further order that as to the whole or any part of the costs specified in the order, instead of taxed costs, that person shall be entitled to - .... (d) a sum in respect of costs to be ascertained in such manner as the Court may direct. Thus section 43 in combination with the rules confers on the Court a wide discretion to order costs. There is no doubt that an order to pay costs on an indemnity basis is within the ambit of this discretion. In Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225, Justice Sheppard made a comprehensive examination of the authorities relating to indemnity costs. At 230 his Honour stated: Notwithstanding the more specific provisions of some rules of Court, I do not consider that the power of this court to order costs to be taxed on one or other of the bases for taxation other than the party and party basis to be circumscribed in any way. As earlier said, I consider that the provisions of section 43 and the other provisions of the Act referred to confer on the Court a wide power to select an appropriate basis of taxation upon costs which it orders to be taxed. This wide discretion cannot be reconciled with any artificial concept of 'a usual rule' where the 'starting point' in any analysis of costs is that the successful litigant will receive their costs on a party/party basis. In Marks v GIO137 ALR 579 at 586, it was said: The question as to whether indemnity costs will be awarded must always be determined by analysis of the particular facts and circumstances of the case in question. I do not think that there is or should be a type of 'starting point' of party and party costs. InRe Sanchez Ex parte Smits 49 FCR 326 at 326, the basis for dispensing with any notion of a 'usual rule' was further articulated: The 'usual rule' that the successful party will receive an order for costs arose when no such legislative intention had appeared. It seems to me that this rule has been replaced by a statutory regime which leaves the matter in the unfettered discretion of each court to be exercised judicially in light of all the circumstances of the particular case. On the other hand, I agree that if there is nothing remarkable about the case, successful parties should expect to have their costs paid, at least on a party/party basis, by unsuccessful parties. It is now well recognised that the award of costs on a party and party basis does not provide anything like a complete indemnity for the costs incurred in litigation: Marks; Cachia v Hanes [1991] 23 NSWLR 304;Henderson & Ors v Amadio & Ors (Heerey J, unreported, 22 March 1996); Seavision Investment SA v Everett [1992] 2 Lloyds Rep 260. An award of indemnity costs can therefore be viewed as akin to a penalty to be imposed for one or more particularly good reasons. Justice Sheppard in Colgate at 233 outlined some of the bases for the award of indemnity costs: