FEDERAL COURT OF AUSTRALIA TSG Franchise Management Pty Ltd v Cigarette & Gift Warehouse (Franchising) Pty Ltd (No 3) [2016] FCA 828 File number: VID 764 of 2014 Judge: DAVIES J Date of judgment: 20 July 2016 Catchwords: COSTS – application for costs on an indemnity basis – relevant principles – where failure to comply with discovery obligations – effect of failure to provide proper discovery – application granted from date of discovery order Cases cited: Colgate-Palmolive Company v Cussons Pty Limited (1993) 46 FCR 225; [1993] FCA 801 Fountain Selected Meat (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397; [1988] FCA 202 Hamod v New South Wales (2002) 188 ALR 659; [2002] FCA 424 Re Wilcox; Ex parte Venture Industries Pty Ltd (No 2) (1996) 72 FCR 151; [1996] FCA 1942 TSG Franchise Management Pty Ltd v Cigarette & Gift Warehouse (Franchising) Pty Ltd (No 1) [2015] FCA 739 TSG Franchise Management Pty Ltd v Cigarette & Gift Warehouse (Franchising) Pty Ltd (No 2) [2016] FCA 674 Ugly Tribe Co Pty Ltd v Sikola [2001] VSC 189 Xat Ky v Australvic Property Management Pty Ltd (No 2) [2007] FCA 1785 Date of hearing: Determined on the papers Date of last submissions: 1 July 2016 Registry: Victoria Division: General Division National Practice Area: Commercial and Corporations Sub-area: Regulator and Consumer Protection Category: Catchwords Number of paragraphs: 11 Counsel for the Applicant: M Robins QC with B Gibson Solicitor for the Applicant: Mills Oakley Lawyers Counsel for the Respondent: D Williams QC with D Manly Solicitor for the Respondent: Nyst Legal ORDERS VID 764 of 2014 BETWEEN: TSG FRANCHISE MANAGEMENT PTY LTD Applicant AND: CIGARETTE & GIFT WAREHOUSE (FRANCHISING) PTY LTD Respondent JUDGE: DAVIES J DATE OF ORDER: 20 july 2016 THE COURT ORDERS THAT: 1. The respondent pay the applicant's costs of the proceeding, with such costs to be paid on an indemnity basis as from 3 July 2015. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT DAVIES J: 1 On 8 June 2016 I gave judgment for the applicant ("TSG") on each of its claims (TSG Franchise Management Pty Ltd v Cigarette & Gift Warehouse (Franchising) Pty Ltd (No 2) [2016] FCA 674) and orders were subsequently made, save with respect to the costs of the proceeding as an application was foreshadowed by TSG that it would seek to have its costs paid by the respondent ("Freechoice") on an indemnity basis. Pursuant to directions of the Court, the question of costs was left to be determined on the papers and the parties filed written submissions. 2 TSG has submitted that an order for costs on an indemnity basis is justified having regard to the following matters: Freechoice engaged in the following conduct during the proceeding that was either contrary to known facts or law or which unreasonably affected [TSG's] ability to run its case, imposed costs on [TSG] and unnecessarily delayed and prolonged the case: (a) Freechoice's initial discovery was grossly inadequate leading to the application and the orders made 3 July 2015; (b) Freechoice failed to comply with the orders made 3 July 2015 and produced further self evidently relevant and important discoverable documents during the trial; (c) Freechoice sought to conceal from TSG and the Court documentary evidence, constituted by the "MD Report No. 24", that revealed the full involvement of senior Freechoice management in the "Competitor Project"; (d) Freechoice sought to conceal from TSG and from the Court the unlawful nature of Mr Whelan's solicitation, from a former associate at [British American Tobacco Australia ("BATA")], of the confidential stick volume data of TSG and other competitor stores on which Freechoice relied in inducing TSG's franchisees to breach their contracts; (e) Freechoice refused to call, as witnesses in the substantive proceeding, Beynon or Whelan, who were critical to resolving the issues in dispute. Instead Freechoice chose to call relatively junior employees with little or no knowledge of the material events in issue, or the state of mind of Freechoice, in order to conceal from the Court its true knowledge and intentions in approaching the TSG franchisees. (f) It was only when TSG obtained oral evidence from Ms Norvock under subpoena which exposed the true extent of Freechoice's misconduct (and failure to give proper discovery) that Freechoice sought to re-open its case in order to call Whelan as a rebuttal witness. The honesty of Whelan's evidence was criticised by the Court. The late and unreliable evidence of Whelan, caused an adjournment of the proceeding and imposed costs on TSG in obtaining a responsive affidavit from Ms Norvock and preparing for and conducting a full day of cross examination of Whelan. (g) Freechoice's attempt at trial to pass off Ms Norvock's state of mind as that mind of Freechoice, in order to avoid calling Beynon, was contrary to the true facts known to Whelan and Beynon, the latter of whom was present for most of the evidence. (h) In circumstances where the only real defence raised by Freechoice was that it did not intend to induce Ms Walters to breach her franchise agreement with TSG, Freechoice must have known, on the facts known to it and found by the Court, that, having regard to the clearly established law, it had no defence. It may be inferred that the conduct set out above was directed at concealing, as best it could, the facts from TSG and the Court. This conduct constituted a "high handed presumption". (footnotes omitted) 3 It was further submitted that: Had Freechoice given proper discovery before trial, then it is almost certain that the trial would have been substantially shorter. Indeed, given the damning evidence in the undiscovered MD reports and the BATA letter, there would have been strong likelihood of a resolution pre-trial by agreement. But Freechoice instead chose to conceal critical documents from the discovery process and to put TSG to the high cost of running a contested trial, where Beynon and Whelan who were privy to the full content of the MD Reports must have known that they had no defence given the content [of] those non-discovered document[s]. For that reason and the others set out above, TSG should receive a complete indemnity for its costs. 4 Freechoice did not dispute that TSG is entitled to its costs of the proceeding on a party-party basis but cavilled that it should be required to pay costs on an indemnity basis. 5 Freechoice argued that although its discovery was found to be manifestly inadequate, TSG was unable to point to any material disadvantage that it suffered as a consequence of the late discovery and that in so far as its late discovery imposed an additional costs burden upon TSG, the appropriate order was an indemnity costs order in respect of any costs thereby thrown away. It was also argued that TSG's submission, that if proper discovery had been made at the outset the entire proceeding may have been resolved at an early stage, was "clearly overreach". It was submitted that: … [Freechoice] continued to defend the proceeding after all documents were discovered, and continued to advance arguable submissions both as to liability, and as to remedies. This was hard-fought litigation between commercial rivals. Little if any was conceded at any stage, save for some reasonable and proper concessions made by [Freechoice] in both its pleadings and its opening submissions (admitting most if not all of its relevant conduct, and enabling the trial to focus on the key issue as to its intention). Further, at all stages of the proceeding [TSG] sought relief travelling beyond that to which it was properly entitled, including permanent injunctive relief of a kind which was too wide, and which would have prevented [Freechoice] from engaging in otherwise lawful conduct. It is at best speculation (and, in the circumstances of this case, almost certainly erroneous speculation) to suggest that timely discovery by [Freechoice] would have resulted in an early resolution of this proceeding. 6 Freechoice disputed that it had lacked an arguable defence and argued that the other matters advanced by TSG did not bear on the question of indemnity costs. 7 It is well-settled law that indemnity costs should not be ordered unless there is some special or unusual feature of the case that justifies departure from the ordinary practice: Colgate-Palmolive Company v Cussons Pty Limited (1993) 46 FCR 225; [1993] FCA 801 at 230–234 (FCR); Re Wilcox; Ex parte Venture Industries Pty Ltd (No 2) (1996) 72 FCR 151; [1996] FCA 1942 at 152–153 (Black CJ) and 156–158 (Cooper and Merkel JJ) (FCR). In Hamod v New South Wales (2002) 188 ALR 659; [2002] FCA 424 at 665 (ALR) (per Gray J, Carr and Goldberg JJ agreeing), the Full Court explained the principle for an award of indemnity costs in the following terms: Indemnity costs are not designed to punish a party for persisting with a case that turns out to fail. They are not awarded as a means of deterring litigants from putting forward arguments that might be attended by uncertainty. Rather, they serve the purpose of compensating a party fully for costs incurred, as a normal costs order could not be expected to do, when the Court takes the view that it was unreasonable for the party against whom the order is made to have subjected the innocent party to the expenditure of costs. The cases illustrate the appropriateness of awarding costs on an indemnity basis where there has been particular misconduct that caused a loss of time to the Court and to other parties, where proceedings were commenced or continued in wilful disregard of known facts or clearly established law, where allegations were made which ought never to have been made, or where the proceeding was unduly prolonged by groundless contentions: Colgate-Palmolive v Cussons 46 FCR 225 at 233; Fountain Selected Meat (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397; [1988] FCA 202 at 401 (ALR); Xat Ky v Australvic Property Management Pty Ltd (No 2) [2007] FCA 1785 at [12]–[13]; Ugly Tribe Co Pty Ltd v Sikola [2001] VSC 189 at [7]. 8 In the present case, there was misconduct by Freechoice by its wilful disregard of its discovery obligations. In the judgment, I found Freechoice's discovery to be manifestly inadequate. At [33], I referred to the failure of Freechoice to discover a letter of offer from Freechoice to Ms Walters which was only produced by Freechoice during the course of the trial upon the document being called for by TSG's counsel, although the document was within the terms of the discovery in the proceeding. Mr Whelan swore an affidavit in which he purported to provide an explanation for the failure to provide proper discovery which I found to be "both unconvincing and unsatisfactory". At [56], I referred to the failure of Freechoice to discover the MD Reports which were the subject of a specific category of discovery ordered by the Court on 3 July 2015. Those reports were only produced in answer to TSG's call on the third day of trial. I rejected Mr Whelan's explanation as to why those documents were not discovered earlier, which was evasive and not plausible. Another key document that was not discovered was a letter from British American Tobacco Australia ("BATA") to Mr Beynon of Freechoice complaining that the representations in issue were false and demanding that Freechoice cease and desist making such representations. That letter was never discovered by Freechoice. Instead the letter was produced for the first time at trial by BATA on subpoena. 9 I accept the submission for TSG that the failure to discover critical documents without proper explanation justifies an award of indemnity costs. The failure to produce the MD Reports prior to trial significantly impacted on the way in which TSG had prepared for, and conducted its case. It also caused a delay in the trial to enable TSG's lawyers to consider the documents, and then the need for TSG to recall one of its witnesses after it had closed its case in order to put those documents to that witness. Pertinently, the further evidence taken from that witness concerning the MD Reports led to an application by counsel for Freechoice for leave to call Mr Whelan in consequence of the further evidence adduced from that witness. In TSG Franchise Management Pty Ltd v Cigarette & Gift Warehouse (Franchising) Pty Ltd (No 1) [2015] FCA 739 I gave leave to Freechoice to adduce evidence from Mr Whelan. That necessitated a further delay in the trial with additional expense and time involved and Freechoice's submission that TSG cannot point to a material disadvantage which it suffered at trial due to Freechoice's late discovery must be rejected. It is clear that TSG had prepared for trial and put its case without the benefit of the MD Reports that gave rise to the need to recall one of its witnesses. The failure to make that discovery deprived TSG of the opportunity to review those documents before deciding on the evidence that it would adduce and the cross-examination that would be conducted of Freechoice's witnesses. 10 Freechoice's misconduct in relation to withholding key documents that were plainly discoverable pursuant to court order did have a significant impact on the conduct of the trial but it is speculative as to whether proper discovery at an earlier point in time would have led to a settlement without the need for a trial. I am also not persuaded that Freechoice must have known it had no real defence. Ultimately the case turned on issues of fact and reliability of witnesses and whilst Mr Whelan was not shown to be a credible or honest witness it does not follow that the defence was one that was never capable of being advanced. Mr Whelan's conduct in relation to obtaining and using BATA's confidential information which was revealed in this proceeding might give rise to an actionable claim against him in some other proceeding but is not properly the basis of an award of indemnity costs in this case. The other matters raised by TSG concern forensic decisions in the conduct of Freechoice's defence and do not justify an indemnity costs order for the whole of the proceeding. 11 I am not persuaded that TSG should have its costs of the whole proceeding on an indemnity basis but it is entitled to its costs on an indemnity basis as from 3 July 2015, when Freechoice was ordered to make discovery of the MD Reports. Accordingly I will order Freechoice to pay TSG's costs of the proceeding, with such costs to be paid on an indemnity basis as from 3 July 2015. I certify that the preceding eleven (11) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies. Associate: Dated: 20 July 2016