FEDERAL COURT OF AUSTRALIA Shape Shopfitters Pty Ltd v Shape Australia Pty Ltd (No 4) [2017] FCA 1277 File number: VID 953 of 2015 Judge: MORTIMER J Date of judgment: 31 October 2017 Catchwords: COSTS — whether applicant should pay respondent's costs on an indemnity or party/party basis – whether unreasonable for the applicant to refuse Calderbank offer in the circumstances – party/party costs ordered Legislation: Civil Dispute Resolution Act 2011 (Cth), s 12 Federal Court of Australia Act 1976 (Cth), s 43 Cases cited: Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224 Beling v Sixty International S.A. (No 2) [2015] FCA 355 Black v Lipovac [1998] FCA 699; 217 ALR 386 Dr Martens Australia Pty Ltd v Figgins Holdings Pty Ltd (No 2) [2000] FCA 602 Royal v El Ali (No 3) [2016] FCA 1573 Shape Shopfitters Pty Ltd v Shape Australia Pty Ltd (No 3) [2017] FCA 865 Veda Advantage Limited v Malouf Group Enterprises Pty Limited (No 2) [2016] FCA 470 Date of hearing: Determined on the papers Date of last submissions: 2 October 2017 Registry: Victoria Division: General Division National Practice Area: Commercial and Corporations Sub-area: Regulator and Consumer Protection Category: Catchwords Number of paragraphs: 31 Counsel for the Applicant: Mr B Caine QC with Mr L Merrick Solicitor for the Applicant: Cornwall Stodart Counsel for the Respondent: Mr N Murray with Ms F St John Solicitor for the Respondent: Turtons Lawyers ORDERS VID 953 of 2015 BETWEEN: SHAPE SHOPFITTERS PTY LTD ACN 082 590 323 Applicant AND: SHAPE AUSTRALIA PTY LTD ACN 003 861 765 Respondent JUDGE: MORTIMER J DATE OF ORDER: 31 October 2017 THE COURT ORDERS THAT: 1. The applicant pay the respondent's costs of the proceeding on a party/party basis. 2. The respondent's costs are to be assessed by way of a lump sum, in accordance with directions to be given by the Court following the final determination of the applicant's appeal from the Court's orders made on 1 August 2017. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT MORTIMER J: 1 On 1 August 2017, I delivered judgment in this proceeding, dismissing the application made by the applicant: see Shape Shopfitters Pty Ltd v Shape Australia Pty Ltd (No 3) [2017] FCA 865 (the Primary Judgment). In my reasons, I indicated that the parties would be given an opportunity to attempt to agree appropriate orders as to costs, taking note of the Court's Practice Notes concerning lump sum orders as to costs. Directions were made accordingly. The parties have not been able to agree. 2 They have filed a considerable amount of material on the question of costs. Further, on 22 August 2017, the applicant filed a Notice of Appeal in relation to the orders made on 1 August 2017. Given the existence of an appeal, it is appropriate that the Court make orders as to the payment of costs and the basis for that payment. However I do not propose to deal with the quantification of costs, pending the outcome of the appeal. That is because the parties are substantially apart on the appropriate amount of costs, and it is apparent from the material that there will need to be a hearing on that question. The determination – even on a lump sum basis – of the amount of costs payable by the applicant will be a complex exercise. In my opinion it is not appropriate for that exercise to occur until the outcome of the appeal is known. Whether there should be an order for costs in favour of the respondent 3 The applicant accepts, in its written submissions, that it is appropriate there be an order for costs in favour of the respondent in this proceeding, given the Court's substantive orders. It submits that the appropriate order for costs is: The Applicant pay the Respondent's costs of the proceeding, on a party/party basis, to be taxed in default of agreement. 4 The respondent submits that it should have its costs on an ordinary basis up until 13 September 2016 when it made an offer of compromise in the proceeding, and thereafter it should have its costs on an indemnity basis. It also submits that a costs order should be made on a lump sum basis, in the sum of $875,000. 5 The straightforward matter in this proceeding is the decision that, in exercise of the Court's discretion under s 43 of Federal Court of Australia Act 1976 (Cth), there should be an order for costs in favour of the respondent. The applicant does not resist such an order. The respondent was wholly successful in resisting the applicant's claims, in a proceeding that was efficiently, effectively and responsibly conducted on behalf of both parties. There is no conduct by the respondent which would justify the Court refusing to order the applicant to compensate the respondent to some degree for the costs it has incurred in this proceeding. 6 The two less straightforward issues are the basis for the costs order and whether, having determined the basis, the calculation of the amount of costs should be by way of a lump sum or by way of taxation. I turn to deal with those two matters. Party/party or indemnity basis 7 The respondent relies on three affidavits in support of its submission that the making of the offer of compromise on 13 September 2016 should lead to an indemnity costs order for costs incurred after that date. Those affidavits are: (1) affidavit of Gregory James Henry, the respondent's solicitor, affirmed 25 August 2017; (2) affidavit of Gregory James Henry affirmed 19 September 2017; and (3) affidavit of Phillipa Robin Alexander, a costs consultant at Costs Partners Pty Limited, affirmed 19 September 2017. 8 The respondent's letter of 13 September 2016 was sent shortly before the applicant's evidence was due to be served. It was sent after the parties had exchanged a number of documents through a cooperative discovery process. As the respondent's letter noted, it was also sent after the parties had engaged in two mediation sessions, at which they each presented position papers and after which had further settlement discussions. 9 The respondent's letter made the following point about the merits of the applicant's claims: (a) It should be apparent to your client that the individuals responsible for selecting our client's new name were not aware of your client's existence when the relevant decision was made. (b) Since our client has been using the 'SHAPE' name, it does not appear to have performed any work for any organisation that has been a client of your client's since it has been known as 'Shape Shopfitters Pty Ltd'. Indeed, there do not appear to have been any common clients since at least 2012. (c) It is obvious that the type of work performed by your client is fundamentally different to the type of work performed by our client, and that our respective clients source their work through completely different and separate channels. (d) There is no evidence of any client or potential client having confused the two companies. (e) It appears virtually certain that your client has not suffered any loss as a result of our client's change of name, nor it is ever likely to. At the same time, given the different markets in which they operate, it is clear that our client has not made any unlawful or otherwise wrongful gain. 10 Having noted those matters, the respondent made an offer with four components: to give a series of undertakings, to pay a certain level of compensation, to pay a sum on account of the applicant's legal costs to date and for the applicant to provide a release. 11 The respondent offered to pay the applicant $35,000 compensation and to pay its legal costs to 13 September 2016 as agreed or as assessed, except for costs already subject to Court orders. Ultimately, the applicant abandoned any claims for compensation or damages, so there is no question that this offer was more favourable than any order as to damages that the applicant could have obtained in the proceeding. The offer in terms of legal costs was clearly a substantial and genuine one. 12 In addition, and in my opinion most critically, the respondent offered the applicant undertakings which, as it submits, "may well have reflected appropriately moulded injunctive relief had Shopfitters been successful in the proceeding". It is necessary to set out in full the form of undertakings that the respondent offered: 3.1 SHAPE Australia not to solicit or perform QSR Shopfitting Services Our client (SHAPE Australia) undertakes that it will not, using any name containing the word 'Shape', solicit or perform any QSR Shopfitting Services anywhere in Australia. SHAPE Australia will not breach this undertaking where the QSR Shopfitting Services form part of a larger project, provided the component involving QSR Shopfitting Services does not comprise more than 25% of the overall project value. 3.2 SHAPE Australia to forward correspondence SHAPE Australia undertakes to forward to your client (SHAPE Shopfitters) any correspondence received by SHAPE Australia that is addressed to SHAPE Shopfitters. 3.3 SHAPE Australia to display website disclaimer SHAPE Australia undertakes to display a disclaimer on its website (in the 'About Us' section or any successor to that section) to the following effect: SHAPE Australia Pty Limited is not related to or otherwise connected with Shape Shopfitters Pty Ltd in any way. 3.4 Duration of Undertakings The undertakings in paragraph 3 will expire on the earlier of: (a) 12 months after Shape Shopfitters ceases to trade under its present name or at all; or (b) a liquidator being appointed to Shape Shopfitters. 3.5 Access to records SHAPE Australia undertakes to provide Shape Shopfitters access to its internal records as may be required by Shape Shopfitters from time to time to monitor SHAPE Australia's compliance with these undertakings and, if necessary, to enforce them. For the avoidance of doubt, this undertaking continues indefinitely. 13 In Beling v Sixty International S.A. (No 2) [2015] FCA 355 at [23]–[25], I set out the applicable principles for determining whether, in the exercise of the Court's discretion, an order for indemnity costs should be made upon refusal of a Calderbank offer. The governing consideration is the reasonableness, or rather the unreasonableness, of the party's refusal of the offer at the time it was made, and in the circumstances in which it was made and refused. In the present proceeding the parties did not dispute the underlying applicable principles. In addition to some of the authorities to which I referred to in Beling, the respondent relied on the observations of Goldberg J in Dr Martens Australia Pty Ltd v Figgins Holdings Pty Ltd (No 2) [2000] FCA 602 at [16]-[17]: 16. It does not automatically follow that the making of an offer of compromise or settlement, whether by way of a Calderbank letter of offer or otherwise, and its non-acceptance followed by a result less favourable to the offeree than that contained in the offer, will lead to an order for the payment of costs on an indemnity basis… As Lehane J observed in Flemington Properties Pty Ltd v Raine & Horne Commercial Pty Ltd (unreported, 11 February 1998, at 2-3): "Underlying that line of authority [concerning the effect to be given to Calderbank offers] is, undoubtedly, a policy of the law in favour of the sensible compromise of disputes. That policy is promoted if a party who rejects a realistic offer of compromise risks an order for indemnity costs if it refuses the offer and ultimately obtains a result no better than that which it would have got by accepting the offer. Its promotion, however, does not in my view require that an applicant who receives any offer and rejects it be at risk of an order for payment of indemnity costs should the applicant ultimately fail to obtain any relief because it fails to make good the cause of action on which it relies. There is, after all, a policy also against deterring parties from pursuing claims to which they reasonably believe themselves entitled. A case – particularly a complex commercial case – in which there is room for substantial argument, and opposing views, about issues going to liability is by no means uncommon. Nor is it uncommon in such a case that an applicant, if it makes good the elements of its cause of action going to liability, will be entitled to substantial damages. The Calderbank policy by no means necessarily requires, in such a case, that the applicant, if ultimately unsuccessful, be required to pay indemnity costs because it rejected an offer of a small fraction of the amount of which it claims. It may be – perhaps is likely to be – otherwise where the offer is a commercially realistic one made upon a sensible and informed assessment of the prospects and risks of the litigation on each side." 17. Thus, whenever a Calderbank offer is made, and is enlivened by a result more favourable to the offeror and less favourable to the offeree, it is necessary to look at all the surrounding circumstances and not simply the fact that an offer was made and rejected and the offeree has achieved a less favourable result than the offer. It is necessary to look at the genuineness of the offer, whether it was realistic, the point of time at which it was made and that whether, in all the circumstances, it was such a reasonable offer as required the offeree to give careful consideration to it. If, in all the circumstances, it was unreasonable for the offeree to reject the offer and not accept it then there are strong grounds for the Court ordering indemnity costs on the basis that the offeror has made a fair and reasonable attempt to resolve the proceeding and has given the offeree the opportunity at a relevant point of time in the proceeding to consider the reasonableness of the offer. 14 The application of these principles will always reduce to a consideration of the particular circumstances existing at the time a particular offer was made in a given proceeding. 15 The applicant raised five matters in its written submissions which it contends made its refusal of the Calderbank offer a reasonable one in all the circumstances. I deal separately below with some other aspects of the parties' conduct which are said by the respondent to support the making of an indemnity costs order. 16 First, the applicant submits the Calderbank offer was made at "an early stage in the proceeding". I do not accept that is a wholly accurate description of the stage at which the offer was made. While it is true that no evidence had been filed and the Statement of Agreed Facts had not been completed, there had been discovery, and the parties had engaged in a substantial mediation process, both formally and informally. This is certainly not a case where a Calderbank offer is made shortly before trial when each of the parties' positions has been made abundantly clear on filed material. However, nor is it a matter where it might be said the applicant lacked any reasonable basis to assess the offer made. I consider the timing of the Calderbank offer in the circumstances to be relatively neutral, and certainly not timing which precluded the applicant from active and substantive consideration of the offer made by the respondent. 17 The second matter relied on by the applicant is that the respondent's letter "identified some assertions" as to why the applicant would not succeed in its claims, but did not contain any detailed analysis of those issues. Again, in my opinion this is not a completely accurate characterisation of the respondent's Calderbank offer. The five matters identified in the respondent's letter, which I have extracted at [9], may have been propositional in form but they went directly to the nature of the applicant's claims. They were said to be based on the material presently available (that is, at the date of the Calderbank letter), which I infer to include the material discovered by each of the parties. Each of those matters is quite specific and although the applicant is correct to contend that ultimately the Court found there was some degree of overlap in the parties' businesses and some evidence of confusion in the marketplace, the propositions put by the respondent in its letter (in particular at (b), (c) and (e)) were matters that substantially remained the case at trial and as found by the Court in its reasons for judgment. It was a core aspect of the respondent's case, supported in detail by documentary material, that the respondent operated in a different kind of market to the applicant, and obtained its customers in ways which would not result in any confusion between the respondent and the applicant by those customers. In my opinion the matters raised by the respondent in these five paragraphs did go to the core of the applicant's claims and were put in the Calderbank offer on the basis of the material that had been discovered. They were matters which ought, reasonably, to have given the applicant cause to reflect on the prospects of its claim. 18 The next matter raised by the applicant is that both at the time of the Calderbank offer and at trial, its case "raised reasonable causes of action corresponding to legitimate commercial concerns". I accept, as the applicant submits, that findings were made after the trial that the potential for confusion or misidentification was real and not fanciful: see [160] and [183] of the Primary Judgment. However the applicant well knew, I infer, because it is clearly established in the authorities and the applicant was well-represented, that mere confusion would not suffice for a successful cause of action, either under the Australian Consumer Law (ACL) or in passing off. This is not to diminish the genuineness of Mr Billings' concerns about what he perceived to be the threats by the use of the word "Shape" in the respondent's name to the business he had built up. Nevertheless, there does seem to me to have been some determination on the applicant's side to discount or ignore the absence of any significant evidence of substantial confusion and the absence of any evidence of ongoing common customers or shared marketplace. 19 Fourth, the applicant points to what it describes as its "reasonable and responsible" conduct in electing not to pursue any claims for loss and damage. Whether this election came as a result of the Calderbank letter is not disclosed by the evidence, although I note the Amended Fast Track Application, which was amended (among other things) to remove the claim for loss and damage, was filed approximately a month after the Calderbank letter. Nor is it to the point, in assessing unreasonableness for the purpose of the exercise of the costs discretion, to identify any causal connection between the making of the Calderbank offer and the withdrawal of any pecuniary claims. The relevance of the respondent's focus in its Calderbank offer on the absence, in the discovered material, of any proof of loss and damage is that it did go to the merits of the applicant's claim. Although there are cases, including recent ones (see for example Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224 and Veda Advantage Limited v Malouf Group Enterprises Pty Limited (No 2) [2016] FCA 470) where injunctive and declaratory relief has been granted in the absence of any orders for compensation or damages, the absence of any claims for loss and damage is nevertheless a factor which was capable of bearing on the prospects of the applicant securing injunctive and declaratory relief. 20 The applicant then points to the terms of the undertakings proffered in the Calderbank offer and submits that the terms of the undertakings did not entirely address the applicant's concern about the respondent operating in the QSR (or quick service restaurant) market. The applicant contends that the undertakings "committed the Applicant to a long-term process of monitoring the Respondent's compliance". I note that practically speaking, this would have been the same if the Court had granted the injunctive relief sought. The applicant, in a real sense, would have been required to keep an eye on the respondent and to monitor the respondent's compliance with any injunctive relief granted so as to enforce it if the occasion arose. In that sense, the ultimate relief sought is no different to the proffering of undertakings. In either case, the practical burden would fall on the applicant to monitor compliance by the respondent. The respondent's offer did outline a process of verification available to the applicant and in that sense provided, in my opinion, sufficient detail for the applicant to evaluate the offer. The fact that the Calderbank offer, and the undertakings, were expressed to be subject to terms being finalised and recorded in a formal settlement deed was the kind of standard term that in my opinion did not make the offer uncertain and incapable of acceptance in the sense discussed in some of the authorities. 21 I have not found this matter easy to determine. It seems to me that the considerations raised by the applicant and answered by the respondent tend in directions both favourable and unfavourable to a costs order on an indemnity basis. The consideration which might be said to be the most favourable to the applicant is the stage of the proceeding at which the offer was made: namely before any evidence had been filed. However, it is also true to say that the substantive nature of the offer made in the respondent's letter did deliver to the applicant a form of "early victory". It was not simply an offer that each party walk away and bear its own costs. It was an offer containing a substantive and ongoing outcome for the applicant which was not, in the end, too dissimilar from the ultimate relief sought. 22 Nevertheless, the applicable principles require me to be positively satisfied, on the balance of probabilities, that it was unreasonable for the applicant to refuse the Calderbank offer in the circumstances. In that sense, the respondent bears the persuasive burden at least of establishing unreasonableness in the approach taken by the applicant: see Black v Lipovac [1998] FCA 699; 217 ALR 386 at [217]-[218]. Although I consider the matter relatively evenly balanced, I am not positively satisfied the applicant's conduct was unreasonable. The applicant was entitled, given the complexity of the case, to at least wait and see how the evidence fell in chief, once the affidavit evidence was filed and served. The applicant did go on to narrow the nature of the case it put in relation to the respondent's conduct, and I am satisfied that at least to some extent the applicant took note of the matters raised by the respondent in the Calderbank letter. The evidence adduced about confusion of the applicant's subcontractors and other "participants" in the commercial construction industry (see in particular [40]-[41] and [161]-[180] of the Primary Judgment), did give some basis for the applicant's concerns as expressed in this proceeding and did give its allegations a quality of reality which I find difficult wholly to equate with the notion of a continued unreasonable pursuit of its claims in the proceeding. The focus of the approach in the authorities on the circumstances at the time the offer was made is designed to avoid courts reviewing a party's decision to press on with a proceeding with the undoubted benefit of hindsight after a full trial. 23 However the respondent also relies on two other considerations which it submits supports or justifies an award of indemnity costs for the period from 13 September 2016. The first is the applicant's failure to comply with its pre-litigation "genuine steps" obligations. As the respondent correctly submits, both the Federal Court's Costs Practice Note GPN-Costs (at [3.13]) and s 12 of the Civil Dispute Resolution Act 2011 (Cth) entitle the Court to take account of whether a party took genuine steps to resolve a dispute before issuing proceedings in determining appropriate costs orders. The respondent submits that the applicant took insufficient genuine steps because it sent only a single letter of demand to the respondent. There were no discussions and no proposals to engage in any form of negotiation, the respondent submits. I do not consider in the circumstances this is a factor which tends one way or the other in relation to determining whether costs should be awarded on an indemnity or a party/party basis. It is clear that from the outset the respondent had a firm position on the applicant's allegations. The language used to reject the applicant's letter of demand was unequivocal. It did not suggest there was much room for negotiation. The applicant is not to be criticised for failing to take any further steps before issuing proceedings in those circumstances. 24 The second matter raised by the respondent is the ultimate confinement of the applicant's case, by withdrawing any claims for pecuniary relief and by not pressing three of the four pleaded representations in its claim under the ACL. Although it might be said, as the respondent submits, that a narrowing of a case close to trial means that some costs have been thrown away, the fact is that the narrowing of a case also produces substantial efficiencies in the conduct of the trial and this was in my opinion the case in this proceeding. If anything, the way in which the applicant conducted its case saved the parties costs rather than increased them. I do not consider there is anything in this aspect of the respondent's submission. 25 As I have noted the matter is finely balanced. Stepping back, the approach in the authorities in relation to an order for indemnity costs reflects the matters the courts have determined make such an order in the interests of the administration of justice. I am not sufficiently persuaded that the applicant's conduct in refusing the Calderbank offer was, in the circumstances, so unreasonable as to justify an award of indemnity costs and to make such an order in the interests of the administration of justice. The respondent should have its costs on the usual party/party basis. Whether a lump sum costs order is appropriate 26 The Court has moved in a policy sense to a position where, wherever it is practicable and appropriate to do so, the Court prefers to make lump sum costs orders: see Federal Court Costs Practice Note GPN-Costs at [4.1]. That is a matter to which I attach considerable weight in assessing the parties' submissions about the appropriate way in which the amount of costs to be awarded to the respondent should be assessed. 27 In most cases the delays, expense and resources involved in a taxation of costs will be much greater than the resolution of a costs dispute by way of the award of a lump sum: see Royal v El Ali (No 3) [2016] FCA 1573 at [10]. See also the matters to which I referred in Beling at [34]-[42]. 28 What gives some basis for caution in applying the lump sum approach to the present proceeding is the very large amount of costs sought by the respondent by way of a lump sum: namely $875,000. I note this is the figure identified if the respondent's indemnity costs claim is successful, and I have determined that it should not be. 29 The respondent submits that the lump sum should be $780,000 if it were to be awarded costs on a party/party basis for the entire period. This figure, approximately $100,000 less than the lump sum costs sought if it were awarded costs on an indemnity basis from 13 September 2016, is calculated on the basis of the table of calculations contained in Mr Henry's first affidavit at [7]. It is apparent from that table that the vast proportion of the costs are costs claimed in relation to solicitors and counsel, rather than experts, disbursements or lay witnesses (being the other categories). It is apparent that even on a party/party basis, the lump sum claimed by the respondent is very significant indeed, and it is somewhat surprising that, in relative terms, it remains at a level close to the respondent's indemnity costs claim. 30 Nevertheless both parties have provided detailed information which would enable the Court to determine the matter by way of a lump sum. As I have noted earlier in these reasons, it may well be the case that in order to ensure the parties are fairly and fully heard on the question, an oral hearing needs to be conducted, and it is not inconceivable the applicant may wish to test, for example the evidence of Mr Henry about the costs claimed on behalf of respondent. It seems to me these are matters which could be completed, with the assistance of a registrar, in half a day. This would still be a much more efficient and cost effective way to resolve the costs dispute between the parties in this proceeding than to allow the matter to proceed to a formal taxation. 31 For these reasons, I consider it is appropriate in the circumstances to order that the applicant pay the respondent's costs on a lump sum basis, in accordance with a process to be the subject of direction by the Court after the final determination of the applicant's appeal from the Court's orders made on 1 August 2017. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mortimer. Associate: Dated: 31 October 2017