FEDERAL COURT OF AUSTRALIA Keays v J P Morgan Administrative Services Australia Limited (No 2) [2011] FCA 547 Citation: Keays v J P Morgan Administrative Services Australia Limited (No 2) [2011] FCA 547 Parties: COLIN KEAYS v J P MORGAN ADMINISTRATIVE SERVICES AUSTRALIA LIMITED File number: NSD 1375 of 2008 Judge: BUCHANAN J Date of judgment: 25 May 2011 Catchwords: COSTS – application for indemnity costs – Calderbank offer – test to be applied – whether it is necessary that rejection of an offer be imprudent or plainly unreasonable – whether rejection of an offer was imprudent or unreasonable Legislation: Federal Court Rules O 23 r 11 Cases cited: Alexander v Australian Community Pharmacy Authority (No 3) [2010] FCA 506 Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd (No 3) [2002] FCA 1294 Black v Lipovac (1998) 217 ALR 386 Colgate-Palmolive Company v Cussons Pty Limited (1993) 46 FCR 225 Dukemaster Pty Ltd v Bluehive Pty Ltd [2003] FCAFC 1 MGICA (1992) Pty Ltd v Kenny & Good Pty Ltd (No 2) (1996) 70 FCR 236 NMFM Property Pty Ltd v Citibank Ltd (No 2) (2001) 109 FCR 77 Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA (No 5) [2009] FCA 571 Port Kembla Coal Terminal Ltd v Braverus Maritime Inc (No 2) (2004) 212 ALR 281 Ruaro v Ferrari [2008] FCA 307 Sanko Steamship Co Ltd v Sumitomo Australia Ltd [1996] FCA 22 Seven Network Ltd v News Ltd (2007) 244 ALR 374 Sydney Markets Limited v Sydney Flower Market Pty Limited [2002] FCA 283 Date of hearing: Heard on the papers Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 26 Solicitor for the Applicant: Mr MJ Gillis of Gillis Delaney Lawyers Counsel for the Respondent: Mr JJE Fernon SC Solicitor for the Respondent: Freehills IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1375 of 2008 BETWEEN: COLIN KEAYS Applicant AND: J P MORGAN ADMINISTRATIVE SERVICES AUSTRALIA LIMITED Respondent JUDGE: BUCHANAN J DATE OF ORDER: 25 May 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The applicant pay the respondent's costs of the proceedings to judgment, such costs to be taxed if not agreed. 2. The respondent pay the applicant's costs of the respondent's application for indemnity costs, such costs to be taxed if not agreed. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1375 of 2008 BETWEEN: COLIN KEAYS Applicant AND: J P MORGAN ADMINISTRATIVE SERVICES AUSTRALIA LIMITED Respondent JUDGE: BUCHANAN J DATE: 25 May 2011 PLACE: SYDNEY REASONS FOR JUDGMENT 1 On 13 April 2011 I delivered judgment in this matter dismissing the application. I gave directions for written submissions about the question of costs. The respondent has now sought an order for costs on an indemnity basis. That application is put on two alternative footings: an order for indemnity costs of the whole of the proceedings, including an adjustment to costs orders earlier made or agreed, whereby the applicant became liable to meet the costs of some interlocutory matters; and, in the alternative, an application for costs on a party/party basis until 14 December 2010 and indemnity costs thereafter. Each of those alternative approaches requires some explanation. Indemnity costs of the whole case 2 The respondent relies upon the following matters: (i) at the time of the termination of his employment on 5 June 2008 the applicant was offered (in addition to his contractual and statutory entitlements) 12 weeks severance pay (approximately $86,539) and payment representing the value of unvested stock awards (approximately $676,000), totalling approximately $762,539. (ii) in response to a letter of demand from solicitors for the applicant dated 18 June 2008 making a claim for more than $5 million and a further letter from the applicant's solicitors dated 22 August 2008 enclosing a draft application and statement of claim, solicitors for the respondent, on 29 August 2008, renewed the offer earlier made on 5 June 2008. As earlier, execution of a deed of release was required. This offer remained open until Friday, 5 September 2008. The applicant's response was to file his application and statement of claim on 2 September 2008. 3 It is the respondent's contention that the response of the applicant to the offers made to him was imprudent, reckless or unreasonable. 4 There is no need to give separate attention to the offer which was made on 5 June 2008. An offer of that kind made on the occasion that employment was terminated, even if remaining open for the period of one month as it did in the present case, would not ordinarily itself provide an adequate foundation for the award of indemnity costs if proceedings were subsequently commenced. Perhaps exceptions to that general statement may be conceived but it is not necessary to dwell on them in the present case. Normally, in order to sustain a claim for indemnity costs based on an offer of settlement it would be necessary to show that the offer was sufficiently connected with the commencement or threatened commencement of the proceedings. In my view, that connection has not been established with respect to the offer made on 5 June 2008, notwithstanding that it was still open for acceptance when the applicant made his claim for more than $5 million by letter dated 18 June 2008. 5 Of more significance is the fact that the offer made on 5 June 2008 was repeated on 29 August 2008 after the applicant's solicitors had sent a draft application and statement of claim threatening to file them within seven days. On this occasion the offer was clearly connected to the threatened commencement of proceedings. It remained open for only a short period of time. However, although the period during which the renewed offer remained available for acceptance was a relatively short one, the applicant's conduct in commencing the proceedings within the time limited for acceptance made it clear that the applicant preferred to litigate. In the circumstances, the offer of 29 August 2008 qualifies at least for consideration as a possible foundation for the award of indemnity costs. 6 Two matters, however, require further assessment. They are, firstly, by what standard the applicant's response should be judged and, secondly, whether the offer represents in all the circumstances a proper foundation for the award of indemnity costs. I should note also that the respondent did not make any further offer of settlement to which my attention has been drawn, whether by way of a "Calderbank" offer or under O 23 r 11 of the Federal Court Rules. 7 In the absence of any presumptive right arising under O 23 r 11, the discretion to award indemnity costs following rejection of a "Calderbank" offer is a general one. Some difference of view appears from decisions in this Court (including decisions of Full Courts) about the standard to be used to evaluate a response to a Calderbank offer before the discretion is effectively enlivened. It is well established in this Court that mere refusal of a Calderbank offer is insufficient. In Black v Lipovac [1998] FCA 699; (1998) 217 ALR 386 at [217]–[218] a Full Court said: 217. There is a line of authority in the Federal Court supporting the proposition that the mere refusal of a Calderbank offer does not of itself warrant an order for indemnity costs and the offeror needs to show the conduct of the offeree was unreasonable. The cases are WCW Pty Ltd v Charthill Ltd (Olney J, 7 July 1992, unreported), John S Hayes & Associates Pty Ltd v Kimberley-Clark Australia Pty Ltd (1994) 52 FCR 201 (Hill J), Sanko Steamship Co Ltd v Sumitomo Australia Ltd (Sheppard J, 7 February 1996, unreported), MGICA v Kenny (1996) 140 ALR 707 (Lindgren J), Fasold v Roberts (Sackville J, 11 September 1997, unreported). To the contrary is the decision of Rolfe J in the Supreme Court of New South Wales in Multicon Engineering Pty Ltd v Federal Airports Corporation (20 June 1996, unreported). His Honour considered that the non-acceptance of an offer more favourable to the offeree than the judgment ultimately awarded prima facie demonstrated unreasonable conduct and the offeree bore the onus of showing why indemnity costs should not be ordered. 218. In reality there is not a substantial difference between the two views; both accept that the reasonableness of the conduct of the offeree, viewed in the light of the circumstances which existed when the offer was rejected, is relevant to the exercise of the discretion to award indemnifying costs. To the extent there is a difference, we would prefer the by now well established line of authority in decisions of single judges of this Court. However, we would not, with respect, necessarily endorse the view of Sheppard J in Sanko that the conduct of the offeree has to be "plainly unreasonable". To adopt an especially high standard of unreasonableness would operate as a fetter on the discretion to award indemnity costs and diminish the effectiveness of the Calderbank offer as an incentive to settlement. There is in our view force in the comments of Byrne J in the Supreme Court of Victoria in Mutual Community Ltd v Lorden Holdings Pty Ltd (unreported, 28 April 1993) at 12-13: "The policy of the Court is to encourage litigating parties to undertake genuine settlement negotiations and, for that purpose, to face up to serious offers of settlement. The response of a litigant in receipt of an offer of settlement will always be affected by the prospect that the sum which the Court might order including party and party costs may be less advantageous than the terms of the offer. Experience, however, shows that this prospect alone is not always sufficient to compel a litigant to face up to the offer. The further prospect of a super-added costs penalty if a reasonable offer be not accepted is a salutary inducement to an offeree to undertake this often painful task." (Emphasis added) 8 However, some years later, in Dukemaster Pty Ltd v Bluehive Pty Ltd [2003] FCAFC 1 ("Dukemaster"), Sundberg and Emmett JJ put the matter more strictly. They said (at [7]): 7 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) 9 In Seven Network Ltd v News Ltd (2007) 244 ALR 374 ("Seven Network"), Sackville J (at [50]–[62]) referred to the differing statements in Black v Lipovac and Dukemaster and declined to adopt the formulation of "plainly" unreasonable, preferring "imprudent or unreasonable" as an appropriate reconciliation of the two judgments. 10 The reservation expressed in Black v Lipovac about the statements made by Sheppard J in Sanko Steamship Co Ltd v Sumitomo Australia Ltd [1996] FCA 22 ("Sanko") needs to be seen in context. In Sanko Sheppard J referred initially to earlier authorities to the effect that: … there is no authority supporting the proposition that the mere writing of a Calderbank letter would justify an order for costs in favour of a successful party being taxed on a solicitor and client or an indemnity basis. and added: What needs to be emphasised is that the ordinary rule is that, where the Court orders the costs of one party to litigation to be paid by another party, the order is for payment of those costs on the party and party basis … 11 Later, his Honour said, in the passage which has provoked debate: In some cases the so called Calderbank approach may place a weapon in the hands of parties to litigation which ought not be allowed to be abused. The ordinary rule is that costs when ordered in adversary litigation are to be recovered on the party and party basis. Any attempt to disturb that situation needs to be carefully considered. It should only be departed from where the conduct of the party against whom the order is sought is plainly unreasonable. (Emphasis added) 12 However, as Sheppard J observed in Sanko he had, in an earlier case (Colgate-Palmolive Company v Cussons Pty Limited (1993) 46 FCR 225 ("Colgate")), discussed in some detail the rationale for the power to award indemnity costs and the development in this Court of the principles which ought be applied to that question. Sheppard J's judgment in Colgate has since been frequently cited. In Colgate, Sheppard J gave "an imprudent refusal of an offer to compromise" as one example of a circumstance in which indemnity costs had been found justified in some cases. He did not refer explicitly to an "unreasonable" or "plainly unreasonable" refusal of such an offer. 13 In MGICA (1992) Pty Ltd v Kenny & Good Pty Ltd (No 2) (1996) 70 FCR 236 ("MGICA") Lindgren J referred to both Colgate and Sanko. His Honour also surveyed a number of other cases, including a number referred to in Black v Lipovac. From that survey Lindgren J said (at 239–240): In Colgate Palmolive Pty Ltd v Cussons Pty Ltd (1993) 46 FCR 225, Sheppard J noted that "an imprudent refusal of an offer to compromise" was one circumstance which had been thought sufficient to warrant the exercise of the discretion. In John S Hayes, Hill J declined to order indemnity costs in favour of a respondent, noting that the case was not one in which the applicant had had "no chance of success" (at 206). His Honour concluded that it was not "so unreasonable" (at 207) for the applicant to have brought and continued its case against the respondent that indemnity costs should be ordered. Similarly, in Sanko Steamship Co Ltd v Sumitomo Australia Ltd (unreported, Federal Court, Sheppard J, 7 February 1996) (Sanko), Sheppard J said that recovery of costs on the usual party and party basis should "only be departed from where the conduct of the party against whom the order is sought is plainly unreasonable" (at p 9 — emphasis added). 14 In NMFM Property Pty Ltd v Citibank Ltd (No 2) (2001) 109 FCR 77 ("NMFM") Lindgren J suggested (at [82], referring only to MGICA) that the appropriate test was: "the applicant for the award [of indemnity costs] … bears the onus of establishing that the non-acceptance was imprudent or plainly unreasonable". 15 That is the formulation which was adopted in Dukemaster. Goldberg J referred to this distillation of the test in Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd (No 3) [2002] FCA 1294 at [28], although his Honour appeared to actually apply the test of whether refusal of an offer was imprudent or unreasonable, rather than imprudent or plainly unreasonable. Hely J also referred to aspects of imprudence and unreasonableness (not plainly unreasonable) in Sydney Markets Limited v Sydney Flower Market Pty Limited [2002] FCA 283 at [16]–[17], but did not refer to Sanko, MGICA or NMFM. In Port Kembla Coal Terminal Ltd v Braverus Maritime Inc (No 2) [2004] FCA 1437; (2004) 212 ALR 281, Hely J referred (at [34]) to the necessity (on the authorities) to demonstrate: that the conduct of the defendant [as cross-claimant] in failing to accept the Calderbank offer was unreasonable in all the circumstances, so as to justify a departure from the normal rule as to costs … 16 Then, in Seven Network, as I said earlier, Sackville J applied a modified version of the formulation approved in Dukemaster but expressly (at [60]) omitted the word "plainly" saying that the test was whether rejection of the offer was "imprudent or unreasonable". His Honour thought that the "considered" discussion in Black v Lipovac should be preferred to the majority judgment in Dukemaster which did not refer to Black v Lipovac. 17 In Ruaro v Ferrari [2008] FCA 307 Emmett J (one of the majority in Dukemaster) awarded indemnity costs where rejection of an offer had been "imprudent and unreasonable". His Honour did not refer to the authorities. In Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA (No 5) [2009] FCA 571 Logan J indicated that, if there was any difference in substance between Black v Lipovac and Dukemaster he would (as had Sackville J) prefer to follow Black v Lipovac. In Alexander v Australian Community Pharmacy Authority (No 3) [2010] FCA 506 Bromberg J also rejected a test of "plainly unreasonable", referring to Black v Lipovac. 18 For my own part, I think there is a difference (at least there will be in some cases) between a test of "imprudent or unreasonable" and a test whether a rejection is "imprudent or plainly unreasonable". I confess to a preference for the legal analysis given by Sheppard J and Lindgren J which was adopted in Dukemaster. However, it appears to me that the tide has turned in the other direction and that, as a matter of comity, I should conform to the position expressed by Sackville, Logan and Bromberg JJ and in Black v Lipovac itself where the strictness of the test in Sanko was expressly doubted. I would not, therefore, require the respondent to demonstrate that refusal of its offer was plainly unreasonable before indemnity costs were justified. It would be sufficient to make good the contention (as the respondent argued) that the applicant's conduct in refusing the offer was imprudent or unreasonable. 19 There is, however, another aspect of the judgments in NMFM and in Dukemaster which requires attention when all of the circumstances are being considered. In Dukemaster the majority said (at [8]): 8 Whatever the position may be with an offer made under Order 23, a Calderbank offer, or any offer of compromise outside the regime in Order 23, is unlikely to serve its purpose of attracting an indemnity award of costs if the rejecting applicant fails to recover more than what is offered, unless the offer is a reasonable one and contains a statement of the reasons the offeror maintains that the application will fail. In NMFM at [87]-[88] Lindgren J said: "No doubt where a party puts with sufficient particularity to the opposing party the reasons why the latter must fail, yet the latter does not recognise the inevitable, this will be a factor pointing to an award of indemnity costs. … The requirements of 'sufficient particularity' and 'inevitability of failure' are important. In their absence, it would be open to parties to put their respective cases to the opposing party urging it to recognise the merit of what is put in the hope that if it ultimately finds favour with the Court, an award of indemnity costs will follow. If this were correct, one might ask rhetorically, 'Why write a letter as distinct from simply relying on the pleadings?'." (Emphasis in original) 20 In accordance with this approach, in seeking to establish from the terms of its offer that it was imprudent or unreasonable to reject it, a respondent needs to show that the offer was accompanied by some statement of the reasons why the applicant's case would inevitably fail, or at least fall short of the offer. 21 In the present case the terms of the offer were as follows: We refer to your letter of 22 August 2008 enclosing a proposed draft application and statement of claim. As you know, on 5 June 2008, our client advised your client of the termination of his employment. He was provided with a deed of release at that time setting out the terms on which his employment might come to an end. These included payments and benefits in excess of his contractual rights (see, for example, clauses 2.1.1 and 2.3 of the deed of release provided to him). Your client did not sign the deed of release, and has subsequent [sic] been paid all of his contractual and statutory entitlements. Our client is not aware of any basis on which it has any further liability to him. Nonetheless, our client is conscious of the cost and inconvenience of litigation, and wishes to provide your client with one further and final opportunity to accept the arrangements that were offered to him on 5 June 2008 (other than to the extent they have already been paid or provided). Please find attached a revised deed of release. Can you please have it signed by your client and returned to us by 4pm on Friday 5 September 2008, failing which our client's offer will be withdrawn and no further settlement discussions entertained. Should your client commence proceedings against our client, we reserve our client's right to tender this letter on the question of costs (which will be sought on a full indemnity basis). (Emphasis added) 22 In my view, the offer to the applicant did not identify with sufficient particularity the reasons why the application (if filed) must fail. It left it to the applicant to assess his prospects without even the benefit of any pleading in response by the respondent. No detailed rebuttal had been provided by the respondent to the earlier statement advanced on behalf of the applicant in the letter from his solicitors dated 18 June 2008 setting out the matters upon which the applicant did rely. Nor was any response of that kind made to the draft application and statement of claim. Rather, by letter dated 27 June 2008, the respondent's solicitors initially sought further and better particulars of the assertions made in the letter of 18 June 2008. The next step taken by the applicant was service of the draft application and statement of claim. Then the earlier offer was simply repeated. In the circumstances, the respondent did not explain why the applicant's claim was bound to fail. 23 In my view, a sufficient case for the award of indemnity costs for the whole of the proceedings has not been made out by the respondent. Indemnity costs after 14 December 2010 24 The claim for indemnity costs after 14 December 2010 is put on a different basis. According to the program which was fixed for hearing the matter, the proceedings should have concluded on dates scheduled in December 2010. On the day on which oral submissions commenced, which was the second last scheduled day of hearing (14 December 2010), some time was taken up with a discussion about the terms and effect of a notice to produce which had been called on during the proceedings by the applicant, and the significance of a document produced by the respondent at that time. The document set out a scale of payments which corresponded to the amount of severance pay offered to the applicant on 5 June 2008 if he signed a deed of release. A call was then made (on 14 December 2010) for any redundancy policy which had been placed on the respondent's intranet site. No document was produced in answer to the call. The proceedings were adjourned at that point to enable further enquiries to be made by counsel for the applicant about the existence of such a document. Counsel for the applicant wished to rely as part of the applicant's contract of employment on such a document if it was on the respondent's intranet at the time of the applicant's engagement. I referred to this issue in the earlier judgment. As things developed the matter was taken no further and the proceedings continued for a further day in February 2011. 25 The respondent argues now that the time, and its costs, were thrown away. In my view that is too strict a view of matters and one which is only available in hindsight. I think the better view is that the delay in finishing the case was part of the ordinary hazards of litigation. A study of the transcript reveals that, at about the same time, there was discussion of a number of possibilities which may have required an adjournment of the proceedings to allow the respondent some further time. Costs are not awarded against a party as a punishment. They are awarded as a measure of protection to a successful party. However, as the cases which discuss the foundation for indemnity costs consistently stress, the normal rule is that the costs of litigation are usually awarded on a party/party basis and the circumstances must fairly be described as exceptional before there will be a departure from that approach. In my view, the circumstances which led to the proceedings being adjourned on 14 December 2010, and then continuing for a further day in February rather than December, were not exceptional. No departure from the ordinary rule as to costs is justified by those events. Conclusion 26 The result of the foregoing discussion is, in my view, that the appropriate order is that the applicant pay the respondent's costs of the proceedings to judgment on a party/party basis, such costs to be taxed if not agreed. The respondent must pay the applicant's costs of the respondent's application for indemnity costs on the same basis. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Buchanan. Associate: Dated: 25 May 2011