Industrial Court of New South Wales CITATION: George Stewart v All-Fect Distributors Limited and Ors (No 2) [2006] NSWIRComm 303 APPLICANT George Stewart FIRST RESPONDENT All-Fect Distributors Limited SECOND RESPONDENT Fred Joseph Essey PARTIES: THIRD RESPONDENT Johnnie Arthur Essey FOURTH RESPONDENT Joseph Fred Essey FIFTH RESPONDENT Paul Fred Essey FILE NUMBER(S): IRC 4435 of 2003 CORAM: Boland J CATCHWORDS: Costs - Unfair contract - Indemnity costs - Offer of Compromise - Applicant successful in unfair contract claim - Judgment exceeded Offer of Compromise - Case respondents required to meet arguably changed significantly between the date of the applicant's offer and the trial in which the judgment obtained was higher than the amount of the offer - Respondents entitled to benefit of the doubt - Indemnity costs refused Unfair contract - Costs - Indemnity costs - Offer of Compromise - Applicant successful in unfair contract claim - Judgment exceeded Offer of Compromise - Case respondents required to meet arguably changed significantly between the date of the applicant's offer and the trial in which the judgment obtained was higher than the amount of the offer - Respondents entitled to benefit of the doubt - Indemnity costs refused LEGISLATION CITED: Industrial Relations Act 1996 Ballard v Incoll Management (No 2) [2001] NSWIRComm 217 David Hairman v FileNET Corporation Pty Limited [2002] NSWIRComm 76 CASES CITED: George Stewart v All-Fect Distributors Limited and others [2006] NSWIRComm 195 Marsland v Andjelic [No 2] (1993) 32 NSWLR 649 Multicon Engineering Pty Ltd v Federal Airports Corporation (1996) 138 ALR 425 South Eastern Sydney Area Health Service & Anor v King [2006] NSWCA 2 HEARING DATES: 04/08/2006 DATE OF JUDGMENT: 09/20/2006 APPLICANT Mr D Shoebridge of counsel Solicitor: Mr J Sefton Employment Lawyers LEGAL REPRESENTATIVES: RESPONDENTS Solicitor: Mr J Hassett Hassett Dixon JUDGMENT: INDUSTRIAL COURT OF NEW SOUTH WALES CORAM: Boland J Wednesday 20 September 2006 Matter No IRC 4435 of 2003 GEORGE STEWART v ALL-FECT DISTRIBUTORS LIMITED & ORS (No 2) Application under s 106 of the Industrial Relations Act 1996 JUDGMENT ON COSTS [2006] NSWIRComm 303 1 In June 2006, judgment was given in favour of granting relief to the applicant, George Stewart, in an action under s 106 of the Industrial Relations Act 1996: George Stewart v All-Fect Distributors Limited and others [2006] NSWIRComm 195. The Court ordered that: (1) The contract entered into between the applicant, George Burns Stewart and the first respondent, All-Fect Distributors Limited in or about early 1994 and the contract entered into between the applicant and the first respondent in or about 1996 are declared to be unfair contracts on the following grounds, namely that the contracts: (a) were unfair, harsh and unconscionable; (b) were against the public interest; (c) provided a total remuneration that was less than a person performing the work would receive as an employee performing the work; (d) avoided the provisions of an industrial instrument, namely, the Commercial Travellers, &c., (State) Award. (2) The contracts are varied by inserting a provision to the following effect: All-Fect Distributors Limited is required to remunerate the George Burns Stewart at a rate commensurate with half of the Minimum Award Rate that would be payable to the applicant if he were a Local Employee under the provision of the Commercial Travellers, &c., (State) Award together with the locomotion allowance payable to a Local Employee in respect of a motor vehicle up to and including 2,000 cc during the life of the contracts. (3) The respondents shall pay to George Burns Stewart an amount of $52,000 on the basis that first respondent shall pay one-half, the second respondent shall pay one-quarter and the fourth and fifth respondents shall jointly and severally pay one-quarter. In the absence of any agreement as to the calculation of this amount the parties, or any of them, have liberty to have the matter re-listed before the Court. (4) The respondents shall pay interest on the amount specified in Order (3) hereof in accordance with Schedule 5 of the Uniform Civil Procedure Rules 2005. The interest shall be payable from the date of filing of the original summons for relief to the date of this judgment. (5) The respondents shall pay the applicant's costs of the proceedings in an amount as agreed or assessed. If the parties are unable to agree, they have liberty to approach. 2 The parties were unable to agree on costs or the calculation of interest. The parties were directed on 14 July 2006 to file written submissions on the matters in dispute and were advised the issues would be determined on the papers. 3 In support of the orders the applicant relied on the affidavit of Julian Peter Sefton, solicitor with day-to-day carriage of the matter on behalf of the applicant. That affidavit had attached to it a letter to the applicant from his solicitors dated 31 March 2004 confirming the applicant's instructions to convey to the Respondents an Offer of Compromise in the sum of $20,000 plus costs as agreed or assessed. The Offer, dated 30 March 2004, was conveyed to the respondents on 31 March 2004. The Offer remained open for 28 days. 4 In relation to interest, the applicant submitted it was essentially a mathematical exercise and agreement was anticipated from the respondents. In any event, the applicant contended that the interest payable on the sum awarded to the applicant in Order (3), namely, $52,000.00 in circumstances where Schedule 5 of the Uniform Civil Procedure Rules was applied, entitled the applicant to interest in the sum of $13,424.55. Accordingly, the applicant sought to vary Order (4) of 19 June 2006 as follows: The respondents shall pay interest on the amount specified in Order (3) hereof in the sum of $13,424.55 on the basis that first respondent shall pay one-half, the second respondent shall pay one-quarter and the fourth and fifth respondents shall jointly and severally pay one-quarter. 5 In relation to the question of indemnity costs, the applicant moved the Court for an order for indemnity costs pursuant to r 216(4) Industrial Relations Commissions Rules 1996 for those costs incurred by the applicant after 30 March 2004 on the basis that the applicant served an Offer of Compromise dated 30 March 2004 in accordance with the Rules such offer having been acknowledged as received by the respondents and rejected by them. The Offer, in any event, lapsed after 28 days. 6 The applicant made a verbal offer of $20,000.00 plus costs as agreed or assessed during the Conciliation conducted by Grayson DP on 26 March 2004. The respondents rejected the offer and proposed that the matter settle on the basis of an all-inclusive payment to the applicant of $8,000. The Offer of Compromise was then subsequently issued by the applicant. 7 The applicant sought that Order (5) of 19 June 2006 be varied as follows: The first, second, fourth and fifth respondents shall jointly and severally pay the applicant's costs of the proceedings in an amount as agreed or assessed on a party-party basis to 30 March 2004 and on an indemnity basis thereafter. 8 The respondents, in expansive written submissions, opposed the granting of indemnity costs. No submissions were made by the respondents in respect of interest. Consideration 9 Rule 216 of the Industrial Relations Commission Rules provides as follows: 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. 10 The critical provision here is, of course, r 216(4). The applicant's position, simplified was that: he made a reasonable Offer of Compromise of $20,000 to settle the matter; there was a private and public interest to bring about prompt and efficient disposal of the litigation; the respondents unreasonably refused to settle on the basis proposed by the applicant; there was nothing novel or unusual about the applicant's case; the Court's order in respect of the applicant's claim was significantly more favourable than the Offer of Compromise; the respondents carried the onus to satisfy the Court there was a proper basis to displace the applicant's rights under r 216(4); and, the respondents had not discharged that onus. 11 The prima facie consequence of non-acceptance of an Offer of Compromise will be that the rule will be enforced against the non-accepting party: Morgan v Johnson Green v Lovatt Gambrill v Cook (1998) 44 NSWLR 578 per Mason P at 581. It is clear from the authorities that the onus is upon the offeree to establish that it was reasonable for him not to accept the offer: Marsland v Andjelic [No 2] (1993) 32 NSWLR 649 at 654; South Eastern Sydney Area Health Service & Anor v King [2006] NSWCA 2; Multicon Engineering Pty Ltd v Federal Airports Corporation (1996) 138 ALR 425 at 440; David Hairman v FileNET Corporation Pty Limited [2002] NSWIRComm 76 at [14]-[15]; Ballard v Incoll Management (No 2) [2001] NSWIRComm 217 at [18]. 12 In South Eastern Sydney Area Health Service & Anor v King the Court of Appeal considered the application of Part 52 rule 22 of the Supreme Court Rules 1970, which was relevantly the same as r 216(4) of the Commission's Rules. At [83] the Court summed up the obligations of a defendant who had been offered a compromise: The onus is on the defendant to persuade the Court that indemnity costs should not be ordered. He must demonstrate the basis on which an order should be made denying the plaintiff's entitlement to indemnity costs. He must establish that he had given serious thought to the risk involved in non-acceptance of the offer, and that he had assessed the plaintiff's case properly and in the context of the rule and the achievement of its purpose — to encourage the proper compromise of litigation, in the private interests of the litigants and in the public interest of the prompt and economical disposal of litigation. Generally, exceptional circumstances are required to justify such an order denying the plaintiff's entitlement. See, generally, Fowdl v Fowdl , Court of Appeal, 4 November 1993, unreported, per Kirby P at 12, 16; Hillier v Sheather (1995) 36 NSWLR 414 at 422-423; Morgan v Johnson (1998) 44 NSWLR 578 at 581-582. 13 At [84] the Court noted the difficulty of putting an accurate estimate on a case's value in advance of the litigation, but indicated those considerations did not provide a basis by themselves for denying the party making the offer an order for indemnity costs: 84 Although the Court may take into account the particular features of a case and the difficulty of putting an accurate estimate on its value in advance of the litigation, those considerations do not provide a basis by themselves for denying the party making the offer an order for indemnity costs: Hillier v Sheather (at 423). In Maitland Hospital v Fisher [No 2] (1992) 27 NSWLR 721 at 725, it was said that a miscalculation in a case with large imponderables, where the course taken by the party to whom the offer was made may have been perfectly reasonable, would provide a basis for denying an order, but the subsequent decision in Hillier v Sheather suggests that, whilst "large" imponderables may be a relevant factor in the particular case in denying an order for indemnity costs, in the general case a party's reasonable belief as to his own chances of success does not alone provide a basis for denying an order for indemnity costs. 14 At [85] the Court held it would be unfair to a defendant to make an order for indemnity costs when the plaintiff's case had changed significantly between the date of the plaintiff's offer and the trial in which the judgment obtained is higher than the amount of the offer: 85 In the present case, the respondent has submitted that the judge had wrongly considered that a belief that the appellants had reasonable grounds for defending the claim constituted exceptional circumstances disentitling her from an order for indemnity costs. However, the fact that the plaintiff's case had changed significantly between the date of the plaintiff's offer and the trial in which the judgment obtained is higher than the amount of the offer does provide a sufficient basis for an order denying the plaintiff's entitlement to indemnity costs: Maitland Hospital v Fisher [No 2] (at 725). The very nature of the situation itself demonstrates that it would be unfair to a defendant to make an order for indemnity costs when the evidence at the trial is different from that known to the defendant at the time of the offer. Whether or not this is an "exceptional" situation does not matter. 15 What the respondents contended in these proceedings was, in effect, that the case they expected to meet at the time the offer of compromise was put to them was different to the case they eventually had to meet at trial. 16 In opposing the awarding of indemnity costs the respondents noted that the applicant filed the summons for relief on the 8 August 2003 claiming that the applicant was an employee of the respondents and thus was entitled to the Commercial Travellers &c (State) Award ("the Award") conditions of employment. 17 Further, that on the morning of the first day of the trial (8 May 2006), the applicant requested and was granted leave to amend the summons for relief. It was submitted the amendment to the summons widened the claim to effectively assert that even if the applicant was an independent contractor, he should still be paid according to, or by reference to, the Award. It was submitted that amendment effectively meant the difference between success and failure for the applicant. The respondents contended that the summons as it stood prior to the amendment would have failed, since the thrust of that summons was that the applicant was an employee who should be remunerated according to the Award. 18 The respondents submitted that the essence of the judgment given on 19 June 2006 was that: (i) The applicant was not an employee but an independent contractor; (ii) The were no shams, nor any misconduct on the part of the respondents; (ii) The contract was nevertheless unfair, and the applicant should receive 50% (or 25% if the alternate basis of the claim were accepted) of the amount claimed. 19 It was further submitted for the respondent that the prima facie application of indemnity costs in the context of a rejected offer of compromise had been displaced for the following reasons: (a) The offer of compromise was given prior to the amendment of the summons; (b) The rejection of the offer of compromise was not unreasonable or imprudent in relation to the summons as it stood at the time the offer was made, on the contrary, the Applicant would have failed on the pre-amended summons; (c) The insistence on the employment relationship, and on sham arrangements, and the length of time devoted to these issues, on which the applicant failed, render it inappropriate in the circumstances of this case to order an indemnity costs order against the respondents on general law principles relating to costs. On the contrary, the applicant is lucky some form of discount was not applied to a party/party costs award. In this connection, the respondents note the comments of Justice Fisher in Trade Practices Commission v Nicholas Enterprises Pty Ltd And Others (1979) 28 ALR 201 where his Honour cited Forbes v Samuel [1913] 3 KB 706 and Gold v Patman and Fotheringham Ltd [1958] 2 All ER 497 as authorities for the proposition that if a considerable portion of the trial is taken up in determining issues upon which a party fails, it is a proper exercise of the Court's discretion to reduce the costs allowed to that party. (d) The nature of the case generally renders an indemnity costs award inappropriate. 20 As to the amendments to the summons for relief in respect of which leave was granted on 8 May 2006 and in respect of which the respondents did not oppose, they were to the following paragraphs of the summons and are underlined: A(7) A declaration that the contract between the Applicant and the First Respondent was unfair, harsh or unconscionable in that it failed to make provision for reasonable notice or a payment in lieu of notice and severance upon termination of the Applicant's employment /engagement . A(9) An order varying the terms of the contract between the Applicant and the First Respondent to provide for the following express terms: - (a) The employer (i.e "the First Respondent) is required to remunerate the employee (i.e "the Applicant") in accordance with and/or a rate commensurate with the rate that would be payable to the Applicant if he were an employee under the provision of the Commercial Traveller & C. (State) Award during the life of the contract. … A(10) An order that the Respondents pay to the Applicant the Applicant's monetary entitlements in accordance with and/or a rate commensurate with the rate that would be payable to the Applicant if he were an employee under the Annual Holidays Act 1944 (NSW), and the Long Service Leave Act 1955 (NSW) and Superannuation Guarantee (Administration) Act 1992 (Cth) . 21 Whilst it may be discerned from the original summons for relief that the applicant was putting his claim in the alternative, that is to say he intended to proceed on the basis that he had been an employee of the first respondent but if he were not successful in that claim in the alternative he was a contractor, it must be said that the framing of the original claim in the alternative was most obscure. The only clue to it was in paragraph A(3), which indicated that one of the claims was for: A declaration that the contract between the Applicant and the First Respondent was unfair, harsh, unconscionable or against the public interest at the time it was entered into or at a later time in so far as it provided a total remuneration that is less than a person performing the work would receive as an employee performing the work. Throughout the summons the applicant was otherwise referred to as an employee and no mention was made anywhere in the summons of the applicant having the alternative status of a contractor. 22 That there was a claim in the alternative was not a surprise to the respondents at the time the trial commenced because in August 2005 the applicant had served them with a Statement identifying the issues for resolution in the proceedings. The first issue identified was: Whether the applicant was, at all times, in truth and substance, either: (a) an employee; or (b) an independent contractor of the first respondent. 23 However, it is not known whether at the time of the conciliation proceedings before Grayson DP and at the time the Offer of Compromise was served on the respondents (March 2004) that they understood the applicant's claim to be in the alternative, as an alternative position is not reasonably apparent from the terms of the original summons for relief. 24 In this circumstance, I consider the benefit of any doubt must lie with the respondents. Consequently, as the respondents may have considered the Offer of Compromise on the basis of a claim that the applicant was an employee (and that they gave no consideration to the possibility of the applicant being an independent contractor) and given that it was determined in the judgment of 19 June 2006 that the applicant was a contractor and not an employee, it seems to me this provides a sufficient basis upon which to decline an order in the applicant's favour for indemnity costs. Orders 25 The Court makes the following orders: (1) The first, second, fourth and fifth respondents shall jointly and severally pay the applicant's costs of the proceedings in an amount as agreed or assessed. (2) The respondents shall pay interest on the amount specified in Order (3) of the Orders made on 19 June 2006 in the sum of $13,424.55 on the basis that first respondent shall pay one-half, the second respondent shall pay one-quarter and the fourth and fifth respondents shall jointly and severally pay one-quarter. ____________________________ 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.