FEDERAL COURT OF AUSTRALIA Commissioner of Taxation v Pratt Holdings Pty Ltd [2003] FCA 178 COSTS – principles relevant to an award of costs – whether Court should depart from the ordinary rule Federal Court of Australia Act 1976 (Cth), s 43 Income Tax Assessment Act 1976 (Cth), s 263 Commissioner of Taxation v Pratt Holdings Pty Ltd [2003] FCA 6 referred Ruddock v Vadarlis (No 2) (2001) 115 FCR 229 referred Dr Martens Australia Pty Ltd v Figgins Holdings Pty Ltd (No 2) [2000] FCA 602 referred THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA v PRATT HOLDINGS PTY LTD (ACN 004 421 961) & ANOR V 781 of 2001 KENNY J 11 MARCH 2003 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 781 OF 2001 BETWEEN: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Applicant AND: PRATT HOLDINGS PTY LTD (ACN 004 421 961) First Respondent PRICEWATERHOUSECOOPERS (A FIRM) Second Respondent JUDGE: KENNY J DATE OF ORDER: 11 MARCH 2003 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: (1) Subject to paragraph (2) below, the respondents pay the applicant's costs of and incidental to the proceeding; (2) The applicant pay the respondents' costs occasioned by the adjournment of the trial on 22 April 2002 and the respondents' costs thrown away by reason of the amendment to the statement of claim on 29 April 2002. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 781 OF 2001 BETWEEN: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Applicant AND: PRATT HOLDINGS PTY LTD (ACN 004 421 961) First Respondent PRICEWATERHOUSECOOPERS (A FIRM) Second Respondent JUDGE: KENNY J DATE: 11 MARCH 2003 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 On 15 January and 4 February 2003, the Court made declarations and orders in this proceeding, having delivered reasons for judgment on 10 January 2003 ("reasons for judgment"): see Commissioner of Taxation (Cth) v Pratt Holdings Pty Ltd & Anor [2003] FCA 6 ("Pratt Holdings"). Each respondent has filed a notice of appeal. 2 Pursuant to orders made on 15 January 2003, the parties have made written submissions on costs. In order to understand these submissions, it is necessary to say a little more about the proceeding to date. The case for the Commissioner of Taxation ("the Commissioner") was that Pratt Holdings Pty Ltd ("Pratt Holdings"), or PricewaterhouseCoopers ("PW") on behalf of Pratt Holdings, was not entitled to deny the Commissioner access to certain documents held by PW on files relating to Pratt Holdings, and that the Commissioner was entitled to have access to these documents pursuant to s 263 of the Income Tax Assessment Act 1936 (Cth) ("ITAA"). The Commissioner maintained, in the alternative, that, if any of the communications in or constituted by the documents was privileged, then Pratt Holdings had waived the privilege by disclosing the communications to PW. The respondents, Pratt Holdings and PW, contended that the documents were subject to legal professional privilege and that the privilege had not been waived, with the result that the Commissioner was not entitled to access to them. 3 In my reasons for judgment, I explained that the documents in dispute fell into 7 categories: see Pratt Holdings, at [18]. Amongst other things, I held that the communications contained in or constituted by the documents in categories (1), (2), (3), (5) and (6) were not subject to legal professional privilege. As stated in those reasons, the documents in categories (2) and (3) constituted communications between PW and Pratt Holdings. Since PW was not (I found) the agent of Pratt Holdings for the purpose of making (or receiving) communications to (or from) Arnold Bloch Leibler ("ABL"), then the respondents' claim for advice privilege was not sustainable: see Pratt Holdings, at [51] and[70]. Since the respondents' claim for privilege in respect of the documents in categories (1), (5) and (6) depended on acceptance of their claim in respect of the documents in categories (2) and (3), then the claim in respect of the documents in these other categories failed too. (It was unnecessary to say anything about the documents in category (7) because these documents were disclosed to the Commissioner prior to trial.) 4 The Commissioner's waiver submission covered the documents in category (4) and, in particular, documents 35, 41, 43, 44, 45, 48, 53, 54, 57, 65, 69, 73, 75, 77, 83, 84, 85, 88 and 98 in "CMR 1": see Pratt Holdings, at [73]. The Commissioner also made a separate but related submission on document 37. As stated in my reasons for judgment, I held, on the evidence before the Court and after inspecting the documents in question, that legal professional privilege attached to and had not been waived in respect of documents 35, 44 (and therefore 76), 69, 73 (and therefore 74), 77 (and therefore 98), but that no privilege attached to document 37 and the other documents to which the Commissioner's waiver submission related. I accepted that the 8 documents (including the 3 copy documents) to which the privilege continued to attach contained the contents of legal advice conveyed by Pratt Holdings' solicitors to Pratt Holdings and disclosed to PW in order to assist its accounting analysis, upon the basis that PW would maintain the confidentiality of the legal advice. (I also held that some of these documents were capable of being disclosed in part without compromising the confidentiality of the legal advice mentioned in them.) 5 For completeness, I should add that I ultimately inspected all the documents in dispute and, in consequence, I concluded that privilege attached to part of documents 32, 49 and 70 (which were identical). parties' submissions on costs 6 In their written submissions, the parties accepted that the Commissioner was entitled to an order for costs in his favour but that the Commissioner should pay the respondents' costs of the adjournment of the trial on 22 April 2002 and the respondents' costs thrown away by reason of the amendment of the statement of claim on 29 April 2002. The respondents maintained, and the Commissioner disputed, that the Commissioner's entitlement to costs should be further reduced to reflect the result on the waiver issue. 7 In written submissions, the respondents accepted that "the Commissioner has been largely successful; however, he failed on the waiver issue to which several affidavits and a not insubstantial part of the submissions were directed". They submitted that, bearing this in mind, the Commissioner should recover only 75% of the costs of the application, excluding the costs of the 22 April 2002 adjournment and the costs thrown away by reason of the amendment to the statement of claim. It was contended in response that the Commissioner had been "substantially successful in relation to the waiver issue", and that the costs should follow the event. the law with respect to costs 8 The power of the Court to make an order for costs derives from s 43 of the Federal Court of Australia Act 1976 (Cth). The power, which is discretionary, "must be exercised judicially and not against the successful party except for some reason connected with the case": see Ruddock v Vadarlis (No 2) (2001) 115 FCR 229, at 234 per Black CJ and French JJ. As their Honours said in that case, at 234 - 235: Within the general discretion of the courts to award costs it is accepted by decisions in both Australian and English jurisdictions that: · Ordinarily costs follow the event and a successful litigant receives costs in the absence of special circumstances justifying some other order. · Where a litigant has succeeded only upon a portion of the claim, the circumstances may make it reasonable that the litigant bear the expense of litigating that portion upon which he or she has failed. · A successful party who has failed on certain issues may not only be deprived of the costs of those issues but may be ordered as well to pay the other parties' costs of them. In this sense "issue" does not mean a precise issue in the technical pleading sense but any disputed question of fact or law. See Hughes v Western Australian Cricket Association (Inc) & Ors (1986) ATPR 40-748 at 48,136; approved by the Full Court in Queensland Wire Industries Pty Ltd v Broken Hill Co Ltd (1987) 17 FCR 211 at 222. 9 The respondents' contention is in effect that, since the Commissioner succeeded only on a part of the application, then the Commissioner should bear the financial burden of that part on which the Commissioner failed. As Goldberg J noted in Dr Martens Australia Pty Ltd v Figgins Holdings Pty Ltd (No 2) [2000] FCA 602 ("Dr Martens"), at [52]: As a general rule, the successful party in a proceeding should be awarded all its costs of the proceeding including reserved costs on a party and party basis. But there are circumstances in which it will be appropriate to depart from that general rule. In particular, in an appropriate case costs may not be awarded where a successful party has failed in respect of distinct issues. 10 In this context, there may be a distinction between the position of applicants and respondents: cf Dr Martens, at [54]. In considering, in Dr Martens, whether a successful defendant should be deprived of an order for costs, Goldberg J observed, at [54]: The observations referred to … in Hughes v Western Australia Cricket Association (Inc) [(1986) ATPR 40-748 at 48,136] and Cummings v Lewis [(1993) 41 FCR 559, at 602-3] show that in appropriate circumstances a successful defendant might be disentitled to an order for costs in respect of discrete and separate issues. Nevertheless, a court should be reluctant to embrace the proposition that, as a general rule, it is appropriate to undertake an enquiry as to who was successful in relation to particular issues in a case to determine whether there should be an apportionment of costs against a successful party. A court should not be too ready to disallow costs simply because a party has failed upon an issue, unless it be quite a separate and distinct issue from the issues in respect of which it succeeded or unless there be some element of unreasonableness or inappropriate conduct in relation to that issue: cf Verna Trading Pty Ltd v New India Assurance Co. Ltd [1991] 1 VR 129 at 152-154. 11 In this proceeding, the Commissioner sought declarations that legal professional privilege did not attach to the communications constituted by or contained in some 109 documents and that the Commissioner was entitled to have access to them pursuant to s 263 of the ITAA. In the result, the Commissioner has succeeded in establishing an entitlement to access in respect of all but 11 documents (5 being merely copies of documents that attract privilege). Bearing this in mind, as well as the considerations referred to in the cases mentioned above, I do not consider it appropriate to reduce the Commissioner's entitlement to costs in the way sought by the respondents. Accordingly, I propose to make the following orders: (1) subject to paragraph (2) below, the respondents pay the applicant's costs of and incidental to the proceeding; (2) the applicant pay the respondents' costs occasioned by the adjournment of the trial on 22 April 2002 and the respondents' costs thrown away by reason of the amendment to the statement of claim on 29 April 2002. I certify that the preceding eleven (11) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny. Associate: Dated: 11 March 2003 Counsel for the Applicant: Mr B Woinarski QC with Ms M Gordon Solicitor for the Applicant: Australian Government Solicitor Counsel for the First Respondent Mrs A Richards QC with Mr R Peters Solicitor for the First Respondent Arnold Bloch Leibler Counsel for the Second Respondent: Mrs A Richards QC with Mr R Peters Solicitor for the Second Respondent: PricewaterhouseCoopers Legal Dates of Hearing: 22 April 2002, 4 & 5 June 2002 Date of Judgment: 11 March 2003