Industrial Relations Commission of New South Wales CITATION: Gorman v Parkinson [2009] NSWIRComm 174 Anne Gorman (First Applicant) Corporate Impacts Consulting Pty Ltd (Second Applicant) Barry Parkinson (First Respondent) Julie Parkinson (Second Respondent) Attain Pty Ltd (Third Respondent) PARTIES: Chip McFarlane (Fourth Respondent) Adept Communications Pty Ltd (Fifth Respondent) John Matthews (Sixth Respondent) Illumined Enterprises Pty Ltd (Seventh Respondent) The Institute of Executive Coaching of Australia Pty Ltd (Eighth Respondent) ACN 106 277 758 Pty Ltd (in liquidation) (Ninth Respondent) FILE NUMBER(S): IRC 3024 of 2005 CORAM: Marks J CATCHWORDS: COSTS AND INTEREST - unfair contract proceedings - offer of compromise - part of basis of award of compensation not contemplated by parties - held did not displace award of indemnity costs - interest awarded Industrial Relations Act 1996 - s 106, s 382. 372, LEGISLATION CITED: Industrial Relations Commission Rules - Rules 57, 58, 216, Part 23 Uniform Civil Procedure Rules 2005 - schedule 5 Abboud v State of New South Wales (Department of School Education) (no 2) [2000] NSWIRComm 110; (2000) 99 IR 299 CASES CITED: Gorman and anor v Parkinson and ors [2008] NSWIRComm 99 Ruby v Marsh [1975] HCA 32; (1975) 132 CLR 642 HEARING DATES: 22 September 2009 DATE OF JUDGMENT: 23 October 2009 Mr J Fernon SC with Mr D Mackay of counsel (First and Second Applicants) Solicitor Breene & Breene, Solicitors LEGAL REPRESENTATIVES: Mr R Goot SC (First to Eighth Respondents) Solicitor Piper Alderman ACN 106 227 758 Pty Ltd (in liquidation) unrepresented JUDGMENT: INDUSTRIAL COURT OF NEW SOUTH WALES CORAM: Marks J Friday 23 October 2009 Matter No IRC 3024 of 2005 Anne Gorman v Barry Parkinson Application under s 106 of the Industrial Relations Act 1996 JUDGMENT ON COSTS AND INTEREST [2009] NSWIRComm 174 1 These are proceedings brought by the applicants, Anne Gorman and Corporate Impacts Consultancy Pty Ltd, against the respondents, Barry and Julie Parkinson, Attain Consulting Pty Ltd, Chip McFarlane, Adept Communications Pty Ltd, John Matthews, Illumined Enterprises Pty Ltd, Institute of Executive Coaching Australia Pty Ltd and ACN 106 277 758 Pty Ltd (in liquidation), under s106 Industrial Relations Act 1996 ("the Act"). In a judgment of 24 June 2009 (Gorman v Parkinson [2009] NSWIRComm 93), I found in favour of the first applicant in that I declared an agreement made in June 2003 between her and the four of the respondents who are natural persons to have been unfair. I made orders varying the agreement as and from 24 June 2004 and for the payment of compensation assessed in the manner set out in my judgment. I reserved matters of costs and interest, which are the subject of this judgment. Costs 2 The proceedings were amended pursuant to leave that I granted in a judgment delivered 21 May 2008 (Gorman and anor v Parkinson and ors [2008] NSWIRComm 99). During the course of submissions, I made costs orders which were associated with the amendment of the proceedings, the need for the proceedings to be adjourned after the hearing of the application for amendment and the impact of the amendments on the proceedings. Those orders were to the following effect; 1. The applicants are to pay the first to eighth respondents' costs thrown away by reason of the adjournment of the proceedings in May 2008; 2. The applicants pay the first to the eight respondents' costs thrown away by reason of the amendment to the proceedings which culminated in the filing of a second amended summons for relief on 17 July 2008; 3. That the first to eighth respondents jointly and severally pay the applicants' costs of the hearing on 5, 6, 7, 21 May 2008; 4. All the above costs are to be paid as assessed under the Legal Profession Act in default of agreement. 3 This then left outstanding the remaining costs of the substantive proceedings. The applicants sought that they be paid on an indemnity basis and in particular as and from 10 April 2006. On that date, the applicants filed an offer of compromise in accordance with Part 23 of the Industrial Relations Commission Rules. 4 The costs consequences of the filing of an offer of compromise are set out in rule 216 which is in the following terms: 216 Offer of compromise (1) Upon the making of an order under Rule 168 (9), a party entitled to costs may, unless the Commission otherwise orders, have those costs assessed up to and including the day the offer was accepted. (2) If a notice of offer contains a term which purports to negative or limit the entitlement to costs, that term shall, unless the Commission otherwise orders, be of no effect for any purpose under Part 23 or this Rule. (3) Subrules (4)–(7) apply to an offer which has not been accepted at the time prescribed by Rule 168 (8). (4) Where an offer is made by an applicant and not accepted by the respondent, and the applicant obtains an order on the claim to which the offer relates no less favourable than the terms of the offer, then, unless the Commission otherwise orders, the applicant shall be entitled to an order against the respondent for costs in respect of the claim from the day on which the offer was made, assessed on an indemnity basis in addition to costs incurred before and on that day, assessed on a party and party basis. (5) For the purpose of subrule (4), where the offer was made on the first or a later day of the hearing of the proceedings, then, unless the Commission otherwise orders, the applicant shall be entitled to costs in respect of the claim from 11 am. on the day following the day on which the offer was made, assessed on an indemnity basis, in addition to costs incurred before that time, assessed on a party and party basis. (6) Where an offer is made by a respondent and not accepted by the applicant, and the applicant obtains an order on the claim to which the offer relates not more favourable than the terms of the offer, then, unless the Commission otherwise orders, the applicant shall be entitled to an order against the respondent for costs in respect of the claim up to and including the day the offer was made, assessed on a party and party basis, and the respondent shall be entitled to an order against the applicant for costs in respect of the claim thereafter, assessed on a party and party basis. (7) For the purpose of subrule (6), where the offer was made on the first or a later day of the hearing of the proceedings, then, unless the Commission otherwise orders, the applicant shall be entitled to costs in respect of the claim up to 11 am on the day following the day on which the offer was made, assessed on a party and party basis, and the respondent shall be entitled to costs in respect of the claim thereafter, assessed on a party and party basis. (8) Where an applicant obtains an order for the payment of a remuneration, compensation or damages and: (a) the amount payable under the order includes interest or damages in the nature of interest, or (b) by or under any Act the Commission awards the applicant interest or damages in the nature of interest in respect of the amount, then, for the purpose of determining the consequences as to costs referred to in subrules (4) and (6), the Commission shall disregard so much of the interest as relates to the period after the day the offer was made. (9) For the purpose only of subrule (8), the Commission may be informed of the fact that the offer was made, and of the date on which it was made, but shall not be informed of its terms. (10) Subrules (4) and (6) shall not apply unless the Commission is satisfied by the party making the offer that the party was at all material times willing and able to carry out what the party offered. 5 The relevant provisions are contained in sub (4). It operates by reference to the obtaining of "an order on the claim" to which the offer relates which is "no less favourable than the terms of the offer". The entitlement to costs assessed on an indemnity basis thereafter arises "unless the Commission otherwise orders". That is, there is a prima facie situation that will operate unless there is some appropriate reason to displace it. 6 The offer contained in the notice of 10 April 2006 was to compromise "all causes of action" which, as I read the notice, was the subject of the claim made against the first to eighth respondents for the sum of $325,000, together with interests and costs. 7 That offer of compromise pre-dated the amendment to the summons made in July 2008, consequent upon the interlocutory proceedings conducted in May 2008. In the proceedings as they were formulated prior to the amendment made in July 2008, the applicants claimed a sum of $450,000 representing three years payment of monies in the nature of salary, which she was deriving from a certain business, together with "25% of the value of the goodwill under the shareholders' agreement as at 30 July 2004 being $1,000,000 plus earnings before income tax in the year ended 30 June 2004 2." The shareholders' agreement related to the establishment of a company that conducted the business from which Mrs Gorman derived an income. 8 In my judgment of 24 June 2009, I found that an agreement made in June 2003 between the personal applicant, Anne Gorman, and each of the personal respondents became unfair and I varied it with effect from 22 June 2004 to make provision for the payment of certain monies to Mrs Gorman. In determining what variation should be effected, I did not have regard to the provisions of the shareholders' agreement which was the basis for the calculation of the payment of certain monies as set out in the original summons and, indeed, in the amended form of summons which was the subject of the substantive proceedings. The relief that I awarded by way of compensation pursuant to s 106(5) of the Act was calculated by reference to 25 per cent of the value of the company that carried on the business, which I calculated in the sum of $247,731. Furthermore, I ordered that Mrs Gorman be paid an additional amount representing 25 per cent of the value of the work-in-progress of the business as at 22 June 2004. The parties reached agreement that the amount for goodwill was $12,000. Finally, I ordered that, in lieu of the amount claimed of $450,000 representing three years loss of earnings, the personal respondents should pay to Mrs Gorman the sum of $75,000 representing loss of earnings. 9 Accordingly, the amount that I ordered that the personal respondents pay to Mrs Gorman, exclusive of work-in-progress, was $322,731, about $2,300 less than the sum of $325,000 referred to in the offer of compromise of 10 April 2006. However, when the sum of $12,000 for goodwill is added to the amount ordered to be paid, then Mrs Gorman would have been entitled to payment of an amount which exceeded the sum of $325,000 by almost $10,000. 10 It was submitted for the respondents that the Court should exercise its discretion against the awarding of indemnity costs, at least from 10 April 2006, because the basis for the calculation of the payment of compensation to Mrs Gorman, which I adopted in my reasons for judgment, was fundamentally different from the basis of the claim made by her, both originally and ultimately by way of the amendment made to the proceedings. This was said to be because there was never any claim made by the applicants for any amount which represented the value of work-in-progress in the business as at the relevant date. No claim referable to the value of work-in-progress was made by the applicants in any form of the summons, no claim for work-in-progress was made by them during the course of the substantive proceedings and the respondents, quite naturally, gave no consideration to this element of the claim because it was never raised as a matter to be considered by them. On this basis it was said that any amount awarded to Mrs Gorman to represent her share of the value of goodwill in the business was a windfall, could not have been anticipated or expected and, in considering whether or not indemnity costs should be awarded by reference to provisions of rule 216(4), that amount should be ignored. 11 It was submitted on behalf of Mrs Gorman that when her claim was formulated by reference to goodwill as in turn referred to in the shareholders' agreement, this was a formula that endeavoured to value the business. It seems to me that this submission should be rejected because the shareholders' agreement, which I described in some detail in my reasons for judgment, was aimed at establishing the value of goodwill only, that is, the intangible asset which goodwill represents. In that goodwill is often calculated by reference to a multiple of earnings (whether expressed as gross, net of tax and interest or otherwise), and work-in-progress is representative of one element of earnings, there is no indication in the shareholders' agreement, nor was there any indication in the evidence given in the proceedings, that any consideration of work-in-progress should be taken into account in any specific way. Work-in-progress, in that it is capable of being quantified, whether on a net or gross basis, is more in the nature of a tangible asset than the kind of asset that is characterised as goodwill. 12 The difficulty that the parties and the Court face in determining this issue is created by the nature of s106 proceedings. The Court is required to make a determination as to whether a contract (as defined by s 105 in its extended sense) is unfair. A finding as to whether something is unfair involves the application of a value judgment to a set of circumstances. Once a finding of unfairness is made, it is then necessary to determine what consequential orders by way of variation or avoidance ought to be made. Once that matter has been determined, it is then necessary to consider whether any further consequential relief, by way of the awarding of compensation under s 106(5), is appropriate being compensation that ought properly to be awarded to redress the unfairness and that reflects the variation or avoidance which has been ordered to be made. In the circumstances of these proceedings, the applicants raised a number of alternative contracts or arrangements with respect to which they sought findings of unfairness and consequential relief. As it transpired, for reasons set out in my judgment, I found only one such contract to be unfair and that contract was one made between the individual natural persons and none of the corporate parties. Furthermore, the finding of unfairness which I made, and the consequential relief which I ordered by way of variation, resulted in a particular approach to the awarding of compensation that I considered to be "just". It was in this context that I found (at [224]) that there should be a payment of compensation to Mrs Gorman "to accommodate the loss of the value of her interest in the business and to make provision for the payment of reasonable monies with respect to her loss of income." In determining the value of Mrs Gorman's interest in the business, I eschewed reliance upon the shareholders' agreement, preferring to have regard to a balance sheet of the corporation which conducted the business, adding back, by way of shareholders' funds, monies which I said had wrongly been attributed to loans and adding an amount to include work-in-progress. 13 Without delving into the jurisprudential basis for the manner in which s106 operates, I can briefly observe that the proceedings reflect an inquiry which is made by the Court in order to determine whether a finding of unfairness may properly be made with respect to a contract which is of a kind that falls within s 106. The respective positions of each of the parties will often reflect the opposing outer limits of what might be considered in terms of the matters that need to be addressed in the course of the proceedings. Often the Court will steer a course that, for good reason, is somewhere between the extremes agitated by each of the parties. This may throw up a result that was not specifically contemplated by either party, as was the case in these proceedings by reference to the work-in-progress. 14 Seen in this way, the applicant, Mrs Gorman, has obtained an order "on the claim" to which the offer of compromise made relates that is no less favourable than the terms of that offer. On balance, I am unable to characterise the circumstances in which this occurred and the inclusion of an element of work-in-progress as constituting a reason why the prima facie position which applies under rule 216(4) should not operate. 15 Accordingly, I propose ordering that Mrs Gorman be entitled to indemnity costs as and from 10 April 2006, being the date upon which the offer was forwarded to the respondents' solicitor by facsimile transmission. Interest 16 There are limited references to the power to award interest in the Act and in the Rules. There is a specific provision for the making of an order for interest contained within s 372 of the Act, but this would appear to be confined to orders for the payment of monies made under Part 2 of the Act and does not extend to proceedings brought under s 106. 17 There is specific reference made under rule 58, which is in the following terms: 58 Interest (1) Subject to subrule (2), Rule 57 does not require a party to give particulars of a claim for an order for interest under section 372 of the Act. (2) Where a party making application for orders under Part 9, Unfair Contracts, of Chapter 2 of the Act, claims, as part of that relief, an order for or which includes, interest, particulars must be given of the rates at which, the amounts on which and the periods for which, interest is claimed. 18 Rule 58(2) refers to an application for an order that includes interest made as part of the relief claimed under s 106 of the Act. However, there does not appear to be any other provision of the Act or Rules that specifically empowers the making of an order for the payment of interest on a monetary award made under s 106. 19 It has long been accepted that the Court is empowered to order the payment of interest when dealing with s 106 proceedings as part of the making of an order for the payment of monetary compensation under s 106(5). The authoritative discussion of this matter is contained within the judgment of Schmidt J in the Full Bench decision of Abboud v State of New South Wales (Department of School Education) (no 2) [2000] NSWIRComm 110; (2000) 99 IR 299. Wright J President and Walton J agreed with the observations of Schmidt J concerning the basis for the awarding of interest. At [45] to [47], her Honour said: [45] The role of an interest component in monetary orders made under s88F of the Industrial Arbitration Act 1940, a predecessor to s106, was discussed by two members of the Industrial Commission in Court Session in Thomas Nationwide Transport Ltd v Thomas & Anor (1990) 34 IR 378. That approach has since been followed by the Court and its predecessors. (See Westfield v Helprin (1998) 82 IR 411 at 443-4). [46] In Thomas , Bauer J dealt with the question of interest at p383 and Hungerford J at pp390-94. In the circumstances of that case, the money sum ordered included an amount of interest, calculated from the date of application to the date of judgment. Thereafter, in the ordinary way, that sum attracted interest according to the Supreme Court scale. Both Bauer J and Hungerford J discussed the concept of restitution which monetary orders under s88F effect, having regard to the approach of the High Court in Brown v Rezitis (1971) 127 CLR 157. As to money orders then made under a predecessor to s106, namely s88F of the Industrial Arbitration Act 1940, Barwick CJ observed at p165: "But though there is a generality in the language employed in the sub-section the power to make an order for the payment of money is not, in my opinion, unlimited particularly as to the persons against whom such an order may be made. The problem is to ascertain the limitation by construction of the section. It seems to me that the expression 'in connection with' the contract or arrangement varied or avoided provides the necessary limitation as to the nature of the orders for payment of money which can be made and as to the person against whom they may be made. The draftsmanship of the section is inadequate: but I think the expressed intention as to this limitation can be derived from the sub-section read as a whole. Whilst it can be said that the expression 'in connection with' is of wide import, it does emphasize the need for a close connection between the order made and the contract or arrangement varied or avoided. In my opinion, the power to make an order for the payment of money is at best no more than a power to make such an order as can reasonably be thought to have a real connection with the making, variation or avoidance of the contract or arrangement which has been varied or avoided. It may in truth be limited to a power to make an order for payment of money which has in fact a real connection with the making, variation or avoidance of the contract or arrangement. However, in either case it will, of course, include power to make an order for payment of money which has been paid or which was payable under the contract arrangements themselves. But, in my opinion, the power will not be limited to the making of such orders. It will extend to ordering the payment of money where the order on the larger view of the jurisdiction given by the sub-section could be considered to be appropriate to effect wholly or partially the restitution of the parties to their former position upon the variation or avoidance of the contract or arrangement." [47] It follows that the awarding of an interest component is a matter of discretion to be exercised in the particular circumstances of the case in order to discharge the statutory duty, now arising under s106(5), to make a monetary order in connection with the contract varied, "just in the circumstances of the case". This will not necessarily require that interest at commercial rates and for commercial reasons be awarded in every case, even those with a commercial flavour. 20 The parties were agreed that the Court could properly award interest in these proceedings but differed as to the period that should attract the payment of interest. It was submitted by the respondents that the applicants delayed for about a year before commencing proceedings, and that Mrs Gorman should be entitled to interest until May 2008 only because the matter was delayed thereafter consequent upon the adjournment following the amendment of the proceedings which was not effected until July 2008. 21 There was discussion between the parties about the circumstances in which the amendment to the proceedings became necessary, which were initiated by the respondents raising jurisdictional and other issues. Whether and to what extent these issues should have been raised by the respondents at an earlier stage or in a more timely fashion is not, in my opinion, relevant to the determination of this matter. The fact is that the applicants voluntarily amended the proceedings and that there was a resultant delay. In all the circumstances, I propose to allow a period of three months to accommodate this. This will account for the delay occasioned in hearing the interlocutory application, delivering judgment and the consequential filing of an amended summons which then needed to be reviewed by the respondents. 22 I do not regard a period of 12 months delay in commencing proceedings as affecting the determination of the date from which interest should run. 23 In general terms, an award of interest is intended to compensate a successful claimant for the fact that he or she has been deprived of the use of monies which a court has determined should properly have been paid at an earlier date. There is a general discussion about the awarding of interest and the date from which interest should run in the several judgments in the High Court of Australia in Ruby v Marsh [1975] HCA 32; (1975) 132 CLR 642. Those proceedings concerned the awarding of interest and the date from which interest should run in the context of a claim for damages brought by dependents of a deceased person. 24 At pp 652-3, Barwick CJ observed: [26] The purpose of giving courts the power to award interest on damages is to my mind twofold, and neither aspect of the purpose should be lost sight of. In the first place, the successful plaintiff, who by the verdict has been turned into an investor by the award of a capital sum, and whose claim in the writ has been justified to the extent of the verdict returned, ought in justice to be placed in the position in which he would have been had the amount of the verdict been paid to him at the date of the commencement of the action. In the second place, the power to award interest on the verdict from the date of the writ is to provide a discouragement to defendants, who in the greater number of actions for damages for personal injuries are insured, from delaying settlement of the claim or an early conclusion of proceedings so as to have over a longer period of time the profitable use of the money which ultimately the defendant agrees or is called upon by judgment to pay. Each of these reasons, incidentally, in my opinion, calls for the judge to award a rate of interest related to the market place subject to the limit allowed by the legislature. There can be no basis for the award of some nominal rate of interest, unless of course there is good cause for so doing in the special circumstances of the particular case. 25 It is not profitable to consider the several judgments in Ruby v Marsh in any greater detail because they concern an analysis of the basis upon which damages are calculated under the relevant legislation allowing for claims of that nature to be brought. 26 In the context of these proceedings, I have found that the unfairness in the agreement made in June 2003 manifested itself as and from 22 June 2004 and I varied the agreement from that date. In these circumstances it is appropriate, in my opinion, that interest should run from that date because it is from that date that the finding of unfairness and the variation operated so as to deprive Mrs Gorman of the monies which ought properly have been paid to her by way of compensation, as I have found. 27 Accordingly, I intend ordering that interest be payable at the rate fixed from time to time as would apply to awards of interest made in the Supreme Court of New South Wales. The commencement date for the payment of interest is to be 22 June 2004 and interest is payable to the date of my judgment, namely 24 June 2009. 28 In terms of the three months period to which I have earlier referred, there should be excluded from this period any interest payable for the period commencing 5 May 2008 and ending 4 August 2008. Orders 29 I make the following orders: 1. The respondent parties against whom orders for the payment of monies have been made are to pay Mrs Gorman's costs of the proceedings, assessed under the Legal Profession Act 2004 in default of agreement and calculated on an indemnity basis as and from 10 April 2006. 2. The same respondent parties are to pay interest on the amount of compensation awarded in favour of the personal applicant, Anne Gorman, pursuant to my judgment delivered on 24 June 2009 for the period 22 June 2004 to 24 June 2009 but exclusive of the period 5 May to 4 August 2008, calculated in accordance with the rates of interest payable under Schedule 5 of the Uniform Civil Procedure Rules 2005. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.