Clark and Anor v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (500 of 2006, 501 of 2006)
Judgment date: 30 April 2010
Date published: 10 July 2012

Summary of decision:
Outlines the ATO's response to this case which concerns offers of compromise under Order 23 of the Federal Court Rules and Calderbank offers.

Overview of facts:
On 25 November 2008, the applicants made offers upon the principles associated with Calderbank v Calderbank [1976] Fam 93 ( Calderbank .) A Calderbank offer is an offer made to settle the dispute which is without prejudice save as to costs. | Under the offers, the proceedings were to be discontinued, each party would bear their own costs of the proceedings and the applicants would forego the benefit of any existing costs orders. | On 27 November 2008, the respondent rejected the offers. | On 9 December 2008, the applicants made offers of compromise pursuant to Order 23 of the Federal Court Rules (FCR) offering to settle the proceedings on the basis that the respondent would allow their objections in full, each party would bear their own costs of the proceedings and the applicants would forego the benefit of any existing costs orders. The respondent rejected the offers. | On 30 November 2009, the Court delivered judgment in relation to the taxation appeals in favour of the applicants and requested the parties to file written submissions in relation to the determination of costs. | The applicants filed submissions seeking that they be awarded indemnity costs as follows: • from 25 November 2008 in reliance on the respondent's refusal of a Calderbank offer dated 25 November 2008; and • from 9 December 2008 in reliance on the respondent's refusal of a offer of compromise made pursuant to Order 23 of the FCR and dated 9 December 2008. | • from 25 November 2008 in reliance on the respondent's refusal of a Calderbank offer dated 25 November 2008; and • from 9 December 2008 in reliance on the respondent's refusal of a offer of compromise made pursuant to Order 23 of the FCR and dated 9 December 2008. | The respondent filed submissions acknowledging that the respondent should pay the applicants' costs on a party and party basis and submitting, inter alia, that: • the respondent's refusal of the Calderbank offer dated 25 November 2008 was not unreasonable; and • Order 23 of the FCR did not apply to Order 52B proceedings and therefore the offer of compromise made pursuant to Order 23 of the FCR and dated 9 December 2008 could not be made. | • the respondent's refusal of the Calderbank offer dated 25 November 2008 was not unreasonable; and • Order 23 of the FCR did not apply to Order 52B proceedings and therefore the offer of compromise made pursuant to Order 23 of the FCR and dated 9 December 2008 could not be made. | Greenwood J ordered, inter alia, that: • the respondent pay the costs of the applicant of and incidental to the proceeding up to and including 9 December 2008 on a party and party basis; and • the respondent pays the costs of the applicant of and incidental to the proceeding from 10 December 2008 on an indemnity basis. | • the respondent pay the costs of the applicant of and incidental to the proceeding up to and including 9 December 2008 on a party and party basis; and • the respondent pays the costs of the applicant of and incidental to the proceeding from 10 December 2008 on an indemnity basis. | Issues decided by the court | 1. Whether in the exercise of the Court's general discretion, the applicants demonstrated that the respondent's refusal to accept the offer of 25 November 2008 (that is the Calderbank offer) was unreasonable by reference to the circumstances at the time. | The Court held that the Commissioner did not act unreasonably in rejecting the Calderbank offer. | 2. Whether Order 23 of FCR as a whole, has no application in a proceeding by way of an appeal against an appealable objection decision pursuant to Order 52B of the FCR. | The Court held that Order 23 of the FCR applied to an appeal pursuant to Order 52B of the FCR. | 3. Whether the applicants' offer of compromise of 9 December 2008 satisfies the elements of Order 23. | The Court held that the offer satisfied Order 23 Rule 11(4) of the FCR because it was a genuine offer and that the applicants did obtain judgment not less favourable than the terms of the offer. | 4. Whether, under nOrder 23 Rule 11(4) of the FCR, there were exceptional circumstances that would lead to the conclusion that the Court should order costs on a party and party basis rather than an order for costs on a party and party basis to 10 December 2008 and indemnity costs thereafter. | The Court held that there were no exceptional circumstances that justify departure from the presumptive entitlement of the applicants to indemnity costs under order 23 Rule 11(4) from 10 December 2008. | The Commissioner contended that there were four considerations that would lead to the conclusion that the Court should order costs on a party and party basis rather than an order for costs on a party and party basis to 10 December 2008 and indemnity costs thereafter. | The Court noted that where a party offers to settle for a sum which is less than he or she eventually achieves at trial, there is a presumptive entitlement to indemnity costs under Order 23, r 11(4) of the FCR: see CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Pty Ltd . The offeree must demonstrate compelling and exceptional circumstances to support a different order. | The four considerations contended by the Commissioner were: • that the Commissioner had a real prospect of success in the proceeding; • that the substantive matters in question in the proceeding raised a question of significant importance and that it was a matter of public interest that the issue be resolved; • that the Commissioner's contention that the applicants had failed to satisfy the onus of proof pursuant to section 14ZZO of the Taxation Administration Act 1953 remained arguable; and • that, where there are important questions of legal principle and contentious factual issues bearing directly on the amount of the assessment, it is incumbent on the Commissioner in the performance of his statutory duty to defend the correctness of the amount of an assessment by any and all reasonable bases. | • that the Commissioner had a real prospect of success in the proceeding; • that the substantive matters in question in the proceeding raised a question of significant importance and that it was a matter of public interest that the issue be resolved; • that the Commissioner's contention that the applicants had failed to satisfy the onus of proof pursuant to section 14ZZO of the Taxation Administration Act 1953 remained arguable; and • that, where there are important questions of legal principle and contentious factual issues bearing directly on the amount of the assessment, it is incumbent on the Commissioner in the performance of his statutory duty to defend the correctness of the amount of an assessment by any and all reasonable bases. | In relation to the first consideration, the Court held that the notion that an ultimately unsuccessful party had a reasonable chance of success in the proceeding is not an exceptional circumstance. | In relation to the second consideration, the Court held that the fact that a proceeding raises a significant and unresolved question of law that is of public interest is not of itself an exceptional circumstance. | In relation to the third consideration, the Court noted that, in putting the taxpayers to proof on certain issues, the Commissioner had elected to cross examine the taxpayers' witnesses. In doing so, the Commissioner did not put an affirmative case but simply tested the quality of the evidence of relevant facts. The Court held that the Commissioner's failure to establish through cross examination a lack of proof of the relevant facts was not an exceptional circumstance. | In relation to the fourth consideration, the Court held that this consideration is essentially the same as the second consideration. The question is whether the circumstance that the Commissioner believed the assessment to be correct and one that ought to be defended both as to the merits and in the discharge of a statutory duty to defend the correctness of an assessment, is a circumstance which ought to displace the presumption arising under Order 23, r 11. The Court held it did not. | As such, his Honour was not satisfied that any of the four considerations put by the Commissioner constituted exceptional circumstances, and accordingly, held that there were no exceptional circumstances that justified departure from the presumptive entitlement of the applicants to indemnity costs from 10 December 2008. | As a result, indemnity costs were awarded under Order 23 Rule 11(4) of the FCR from 10 December 2008 being the day after the offer.

Issues decided:
1. Whether in the exercise of the Court's general discretion, the applicants demonstrated that the respondent's refusal to accept the offer of 25 November 2008 (that is the Calderbank offer) was unreasonable by reference to the circumstances at the time.: The Court held that the Commissioner did not act unreasonably in rejecting the Calderbank offer. | 2. Whether Order 23 of FCR as a whole, has no application in a proceeding by way of an appeal against an appealable objection decision pursuant to Order 52B of the FCR.: The Court held that Order 23 of the FCR applied to an appeal pursuant to Order 52B of the FCR. | 3. Whether the applicants' offer of compromise of 9 December 2008 satisfies the elements of Order 23.: The Court held that the offer satisfied Order 23 Rule 11(4) of the FCR because it was a genuine offer and that the applicants did obtain judgment not less favourable than the terms of the offer. | 4. Whether, under nOrder 23 Rule 11(4) of the FCR, there were exceptional circumstances that would lead to the conclusion that the Court should order costs on a party and party basis rather than an order for costs on a party and party basis to 10 December 2008 and indemnity costs thereafter.: The Court held that there were no exceptional circumstances that justify departure from the presumptive entitlement of the applicants to indemnity costs under order 23 Rule 11(4) from 10 December 2008. The Commissioner contended that there were four considerations that would lead to the conclusion that the Court should order costs on a party and party basis rather than an order for costs on a party and party basis to 10 December 2008 and indemnity costs thereafter. The Court noted that where a party offers to settle for a sum which is less than he or she eventually achieves at trial, there is a presumptive entitlement to indemnity costs under Order 23, r 11(4) of the FCR: see CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Pty Ltd . The offeree must demonstrate compelling and exceptional circumstances to support a different order. The four considerations contended by the Commissioner were: • that the Commissioner had a real prospect of success in the proceeding; • that the substantive matters in question in the proceeding raised a question of significant importance and that it was a matter of public interest that the issue be resolved; • that the Commissioner's contention that the applicants had failed to satisfy the onus of proof pursuant to section 14ZZO of the Taxation Administration Act 1953 remained arguable; and • that, where there are important questions of legal principle and contentious factual issues bearing directly on the amount of the assessment, it is incumbent on the Commissioner in the performance of his statutory duty to defend the correctness of the amount of an assessment by any and all reasonable bases. • that the Commissioner had a real prospect of success in the proceeding; • that the substantive matters in question in the proceeding raised a question of significant importance and that it was a matter of public interest that the issue be resolved; • that the Commissioner's contention that the applicants had failed to satisfy the onus of proof pursuant to section 14ZZO of the Taxation Administration Act 1953 remained arguable; and • that, where there are important questions of legal principle and contentious factual issues bearing directly on the amount of the assessment, it is incumbent on the Commissioner in the performance of his statutory duty to defend the correctness of the amount of an assessment by any and all reasonable bases. In relation to the first consideration, the Court held that the notion that an ultimately unsuccessful party had a reasonable chance of success in the proceeding is not an exceptional circumstance. In relation to the second consideration, the Court held that the fact that a proceeding raises a significant and unresolved question of law that is of public interest is not of itself an exceptional circumstance. In relation to the third consideration, the Court noted that, in putting the taxpayers to proof on certain issues, the Commissioner had elected to cross examine the taxpayers' witnesses. In doing so, the Commissioner did not put an affirmative case but simply tested the quality of the evidence of relevant facts. The Court held that the Commissioner's failure to establish through cross examination a lack of proof of the relevant facts was not an exceptional circumstance. In relation to the fourth consideration, the Court held that this consideration is essentially the same as the second consideration. The question is whether the circumstance that the Commissioner believed the assessment to be correct and one that ought to be defended both as to the merits and in the discharge of a statutory duty to defend the correctness of an assessment, is a circumstance which ought to displace the presumption arising under Order 23, r 11. The Court held it did not. As such, his Honour was not satisfied that any of the four considerations put by the Commissioner constituted exceptional circumstances, and accordingly, held that there were no exceptional circumstances that justified departure from the presumptive entitlement of the applicants to indemnity costs from 10 December 2008. As a result, indemnity costs were awarded under Order 23 Rule 11(4) of the FCR from 10 December 2008 being the day after the offer.

ATO view of decision:
The Commissioner accepts that Order 23 of the FCR applies to taxation appeals under order 52B of the FCR as in operation immediately prior to 1 August 2011. Likewise, the Commissioner accepts that Rule 25 [or Part 25] of the Federal Court Rules 2011 applies to taxation appeals under Division 33.1 of the Federal Court Rules 2011. | The Commissioner maintains that each offer of compromise made under Order 23 of the FCR or Rule 25 of the of the Federal Court Rules 2011, as the case may be, must be dealt with on its own merits and having regard to the particular facts and circumstances of each offer. For example, the question of whether a matter raises issues of public interest and importance may be a relevant consideration. [1]

Administrative treatment:
Implications for ATO precedential documents (Public Rulings & Determinations etc) | None identified | Implications for Law Administration Practice Statements | No changes to be made to PSLA 2009/9. | [1] See, for example, Australian Competition and Consumer Commission v Metcash Trading Limited (No 2) [2012] FCAFC 55, which considered sub-rule 25.14(2) of the Federal Court Rules 2011.

Legislative references: Federal Court Rules (as in operation immediately prior to 1 August 2011) Federal Court Rules
Case references: Calderbank v Calderbank [1976] Fam 93 CGU Insurance Limited v Corrections Corporation of Australia Staff Superannuation Pty Ltd [2008] FCAFC 173 Australian Competition and Consumer Commission v Metcash Trading Limited (No 2) [2012] FCAFC 55
Subject references: Costs Offer of compromise Indemnity Costs Party and Party Basis Quantum Federal Court Rules (as in operation immediately prior to 1 August 2011)