Cannon v Griffiths & Ors

1. [1]

   This judgment relates to a dispute that has arisen containing the taxation treatment of an amount that had been agreed to be paid to settle proceedings number 2014/213045 (the “substantive proceedings”). As I will explain, the plaintiff seeks declaratory relief to the effect that no tax is payable on the amount that has been agreed to be paid. As declaratory relief is discretionary, a threshold issue has arisen as to whether the Court should entertain the dispute. For the reasons that follow, I consider that it should not.

2. [2]

   To explain this it is necessary to set out the background to the substantive proceedings and in the course of what occurred around the time the proceedings were supposedly settled and thereafter.

3. [3]

   At the outset I record that since this dispute arose I have made interim orders under s 10 of the Court Suppression and Non-Publication Orders Act 2010 prohibiting disclosure of the course of the proceedings and the material that has been tendered, as well as these reasons, other than to the parties and their legal representatives. This was undertaken because the Court was advised that the settlement reached was confidential and that aspects of the mediation process might need to be revealed to resolve the dispute that had arisen. These matters appear to be prima facie capable of raising issues that could warrant a conclusion that the public interest in the maintenance of the confidentiality of the mediation process outweighed the public interest in open justice (s 8(1)(e)).

4. [4]

   In making the interim orders it was made clear to the parties that their operation would need to be reconsidered. Thus the parties were put on notice, from the outset, of the potential for the orders to be lifted in relation to some or perhaps all of the course of the proceedings, including the evidence.

5. [5]

   These observations apply with equal force to these reasons for judgment. I will, at some point, appoint a time, after these reasons have been reduced to written form, for the parties to make submissions as to why any part of the proceedings and these reasons should remain confidential. At this point it suffices to note that, as the issues canvassed included the possible tax treatment of the payment to the plaintiff, the Court will need to be mindful of not taking any step which could possibly be perceived as denying information to the Commissioner for Taxation that she or he would otherwise ordinarily expect to access in proceedings conducted in open Court.

Background

1. [6]

   In July 2011 the plaintiff was employed in the investment banking division of Citigroup Pty Ltd (“Citibank”). Shortly after he commenced, a series of hoax emails were sent from his office computer. The emails were initially circulated within Citibank. However, according to the plaintiff's statement of claim, they ultimately “spread rapidly throughout professional and social email networks across the world”. The plaintiff contends that the distribution of the emails caused him significant psychological harm, emotional distress and reputational damage.

2. [7]

   In July 2014 the plaintiff commenced the substantive proceedings. In the meantime, he continued to be employed by Citibank. He only ceased to be employed on 23 July 2015. The plaintiff did not sue Citibank. Instead he sued four former employees of Citibank who were said to be responsible for the creation and dissemination of the hoax emails. He sued them for the torts of intentional infliction of psychiatric or psychological harm, injurious falsehood and negligence. He sought damages including exemplary and aggravated damages.

3. [8]

   Each of the four defendants was initially represented separately. However, from February 2015 the solicitors acting for Citibank, Herbert Smith Freehills, commenced acting for the four defendants.

The Settlement

1. [9]

   In June 2015 a mediation took place between the plaintiff, the defendants, Citibank and their legal representatives. As part of the mediation process the plaintiff filed a document entitled “Schedule of damages” that set out the parameters of the quantum of his claim.

2. [10]

   The mediation was, at the time, thought to be successful. A document entitled, “Heads of agreement” was signed on behalf of the plaintiff, Citicorp and the four defendants to the substantive proceedings. The substantive part of that document provided

3. [11]

   It can be seen that the heads of agreement expressly provides that it is legally binding on the parties but contemplates the execution of a deed setting out the terms of their agreement in more detail. Thus it was an agreement that falls within the first class of agreements referred to in Masters v Cameron [1954] HCA 72; 91 CLR 353 at 360.

4. [12]

   On 16 June 2015 Herbert Smith Freehills wrote to the plaintiff's solicitors, enclosing a draft deed of release as well as another deed. One of the enclosed deeds proposed the division of the settlement sum such that xxxxxxxx was said to be paid in consequence of the plaintiff's employment being terminated and xxxxxxxx was said to be payable in respect of general and other damages.

5. [13]

   On 22 June 2015 the plaintiff's solicitors responded. They contended, inter alia, that no tax was payable and that the whole amount of xxxxxxxx should be paid with no deductions. The solicitor enclosed a competing version of the deed.

6. [14]

   On 1 July 2015 Herbert Smith Freehills replied, setting out the rationale for the sum of xxxxxxxx being treated as an employment termination payment under the Income Tax Assessment Act 1997 (Cth) (“ITAA 1997”), a matter I will return to.

7. [15]

   This led to further correspondence which is not necessary to describe other than to note that, at one point, it was asserted by Herbert Smith Freehills that during the mediation Senior Counsel for the defendants and Citibank stated that, inter alia, a portion of the payment should be treated as an employee termination payment. The plaintiff's solicitor disputed that assertion.

The application to this Court

1. [16]

   On 23 July 2015 the plaintiff filed a notice of motion. Prayer 1 sought an order that Citibank be joined as a defendant to the substantive proceedings. Prayer 2 sought a declaration concerning the taxation status of the payment referred to in cl (a)(1) of the heads of agreement, which was to the effect that no tax was payable. The source of the Court's power to make the declarations was asserted in the notice of motion to be s 73 of the Civil Procedure Act 2005. Prayer 3 of the notice of motion sought an order directing the parties to execute a deed of settlement that reflected the plaintiff's contention that no tax was payable.

2. [17]

   I listed the motion for directions before me on 24 July 2015. At that time counsel for Citibank and the four defendants, Mr A.T.S. Dawson, identified what he said were a number of difficulties with the notice of motion, including whether it properly invoked s 73 of the Civil Procedure Act, given that Citibank was not a party to the substantive proceedings. To allow that issue to be addressed and the parties a further opportunity to resolve their differences, I adjourned the notice of motion until 29 July 2015 and granted the plaintiff leave to file a summons commencing fresh proceedings returnable on the same day. The matter was listed with some urgency because the plaintiff has arranged alternative employment and the resolution of the dispute over the settlement was said to be a necessary step before he could commence that new position.

3. [18]

   When the matter came before me on 29 July 2015 I granted the plaintiff leave to file a summons of the kind foreshadowed. It named Citibank and the four defendants to the substantive proceedings as the defendants to that summons. The summons sought relief in the following form:

4. [19]

   Counsel for the plaintiff, Mr McCarthy, did not press prayer 1 but did not withdraw it. He pressed prayer 2. His submissions made it clear that prayer 2 seeks relief which would deny any entitlement or obligation on the part of Citibank to withhold any sum on account of taxation. Thus prayer 2 still raises the underlying issue between the parties as to whether any amount should be withheld from a settlement sum on account of any taxation liability. Mr McCarthy pressed prayer 3, but only on the basis that the Court should direct the parties to prepare a deed in a manner that reflects a finding that in effect no tax should be withheld by Citibank.

5. [20]

   Mr Dawson's response to the summons was consistent with what he told the Court on 24 July 2015, namely that as a matter of either discretion or case management the Court should not entertain the claim for declaratory relief at all or certainly not at this point. This was said to be so because the outcome of any declaration would not be binding on the Commissioner for Taxation as he or she is not a party to these proceedings. Mr Dawson contended that, in the absence of the Commissioner being joined, Citibank is placed in a position of particular prejudice in that it might be faced with a declaration from this Court as to its obligations vis-à-vis the plaintiff as to what it must deduct from any payment to be made to the plaintiff, yet it may face action from the Commissioner if he or she takes a different position to this Court in relation to the appropriate withholding. He submitted that, in those circumstances, it would be unfair to Citibank to have forced upon it a procedure that denies it at least the opportunity to, for example, seek a private ruling from the Commissioner as to the taxation position.

6. [21]

   In response, Mr McCarthy contended that there was no realistic prospect of it being ultimately found that taxation was payable on the payment and thus that any amount should be deducted. In those circumstances he submitted that his client should not have to incur further cost and delay before receiving his contractual entitlements under the heads of agreement.

Consideration

1. [22]

   Three propositions should be noted from the outset. First, declaratory relief is discretionary and the discretion to refuse or grant relief is unfettered save that, “judicial pronouncements ought not to be issued unless there are circumstances that call for their making” (Ibeneweka v Egbuna [1964] 1 WLR 219 at 225; Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421 at 435 and 438 per Gibbs J).

2. [23]

   Second, two matters that guide the discretion to deny declaratory relief include the utility of the declaration and the inconvenience its making may cause the parties or to the public (see Young, Declaratory Orders (Butterworths, 2nd Ed, 1984 at [721]).

3. [24]

   Third, given the statutory powers conferred on the Commissioner of Taxation to make a taxation assessment and the force of law applied to such assessments including, for example, by provisions such as formers 177(1) of the Income Tax Assessment Act 1936 (Cth) then, either as a matter of power or discretion, the Commissioner has said to be not amenable to a grant of declaratory relief by this Court in respect of a taxation liability (see Young op cit at [1107] and F.J. Bloemen Pty Ltd v Commissioner of Taxation (1981) 147 CLR 360).

4. [25]

   Against that background it is appropriate to return to the respective contentions of the parties. The starting point is cl (a)(1) of the heads of agreement. Mr McCarthy submitted that, on its proper construction, that clause does not permit Citibank to withhold any amount for taxation even if it was otherwise payable. In effect he sought to construe the payment referred to in cl (a)(1) as a reference to a net amount. That contention has no substance. It is clear that the payment is “inclusive” of inter alia “taxes”. Further, it is also clear that it contemplates a “withholding” of applicable “duties”, “taxes” or other matters.

5. [26]

   It follows that, if there is a bona fide dispute about whether an amount of tax should be withheld, then this Court should not entertain the application for declaratory relief. This is so because the party to whom the obligation is owed is not before the Court and is not able to be joined to be bound by the declaration for the reason already stated.

6. [27]

   Nevertheless Mr McCarthy contended that the proposition that no taxation was properly payable, or at least deductible, in respect of the payment referred to in cl (a)(1), was so strong that there was no justification for delaying the payment of the full amount to his client any further. To address that contention it is necessary to outline in more detail the suggested source of the obligation on Citibank to withhold an amount of tax from the payment referred to in cl (a)(1) of the heads of agreement. Although reference was made to s 118.37 of the ITAA 1997, the submissions focused on the taxation of employee termination payments.

7. [28]

   It was not disputed that, as an employer, Citibank is obliged to withhold and ultimately remit to the Commissioner an amount of tax in respect of employee termination payments, and that a failure to do so is an offence and can otherwise expose Citibank to a penalty (see Taxation Administration Act 1953 sch 1, ss 12-85(b), 16-5, 16-25, 16-30). In particular, s 82.130(1)(a) of the ITAA 1997 defines an employee termination payment as, inter alia, a payment received by the employee “in consequence of the termination” of their employment. Section 82.135 provides various exceptions to this including:

8. [29]

   Mr McCarthy submitted that it was clear from cl (a)(1) of the heads of the agreement that the payment was made in “full and final settlement of the proceedings”. He contended that, as no part of the substantive proceedings involved any claim against the employer, that is Citibank, but did involve claims in respect of the suffering of psychiatric and personal injury then it followed that the payment could not possibly be considered a payment “in consequence” of the termination of the plaintiff's employment.

9. [30]

   Further, Mr McCarthy pointed to the schedule of damages provided to the mediator which he submitted demonstrated that the amount agreed to be paid was clearly referable to the injuries suffered by his client. He submitted that, even if the motivation of Citibank to make the payment was somehow connected to the termination of his client's employment, that was irrelevant, because when it came to categorising the payment the “uncommunicated reasoning” of one party, in this case Citibank, was irrelevant (see McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381 at 391; “McLaurin”).

10. [31]

    Finally Mr McCarthy submitted there was no basis for apportioning the payment in the manner that had been suggested on behalf of Citibank by Herbert Smith Freehills because “it cannot be appropriate where the payment or receipt is in respect of a claim or claims for unliquidated damages only and is made or accepted under a compromise which treats it as a single, undissected amount of damages” to apportion the payment (McLaurin at 391).

11. [32]

    There is considerable force in Mr McCarthy’s contentions, but there are also significant countervailing considerations. The first is to note that the party making the payment under the heads of the agreement is the employer, Citibank, not the defendants to the substantive proceedings. The second is to note that the heads of agreement includes provisions unrelated to the claims for relief in the proceedings, namely, the plaintiff's resignation of his employment and releases in favour of an entity who is not a party to the proceedings, namely the employer, Citibank. These are matters that are potentially capable of leading to a different categorisation of the payment.

12. [33]

    Further, the letter from Herbert Smith Freehills referred to above noted, inter alia, that the plaintiff had previously offered to settle the proceedings without resigning from Citibank for xxxxxxxx xxxxxxxx and that, at the mediation, Citibank had offered to make a payment of xxxxxxxx without any condition that requested the plaintiff's resignation. Collectively all these matters are capable of supporting a characterisation that at least part of the payment is a payment “in consequence” of the plaintiff's resignation. As Mr Dawson submitted, it would follow that the application of the principle in McLaurin might then lead to all of the payment being so characterised, although that will still leave room for the application of the exception in s 82-135(i) of ITAA 1997 noted above.

13. [34]

    Further, all the matters to which I have referred appear to have been matters that were communicated between the parties either during the mediation or at least as recorded in the heads of agreement (cf McLaurin).

14. [35]

    The end result is that I am satisfied that there is a bona fide issue as to whether Citibank is obliged to withhold at least some amount of the payment referred to in cl (a)(1) of the heads of the agreement on the basis that some or all of the payment may constitute an employee termination payment. It further follows that the appropriate forum for determining the existence of any such tax liability is via the statutory scheme providing for tax rulings and assessments. It would be inappropriate for this Court to attempt to truncate that process by granting declaratory relief, especially as such relief will not bind the Commissioner.

15. [36]

    Otherwise I note the following matters. First, in his submissions Mr McCarthy made reference to the fact that the first time any issue concerning the withholding of tax on account that the payment might be characterised as an employee termination payment was raised was after the mediation. This is apparently contested but it is in any event irrelevant. By its terms, cl (a)(1) of the heads of agreement clearly confirms that the parties deferred any issue of tax payable on the amount referred to in that subclause.

16. [37]

    Second, during the course of argument mention was made of the possibility that the Court might order the parties to enter into one of the various competing forms of deeds that have been tendered. The Court's power to order specific performance of the obligations in the heads of agreement does not enable it to rewrite the parties’ agreement, including by adding such matters as recitals or particular clauses that might assist one party or another in obtaining a beneficial tax treatment.

17. [38]

    At this point the only form of deed that the Court could consider ordering the parties to enter into is one that recorded a payment obligation in the exact form of cl (a)(1). If that were to occur then, at the time payment is to be made, Citibank would have to withhold the amount it reasonably considered it was required to in order to meet its taxation obligations and hand over the balance to the plaintiff. The parties would then have to consider their respective positions as a consequence.

18. [39]

    It may be that the plaintiff might then have to await the outcome of a private ruling or assessment process. There is the potential for any such delay in that process to be remedied by interest, but it is clear that the undertaking of that process has the real potential to produce significant inconvenience and cost for the plaintiff. However that inconvenience and cost is simply the consequence of an entry into a settlement which expressly made the payment subject to withholding for tax.

19. [40]

    It follows from the above conclusions that both the summons and the notice of motion should be dismissed.

20. [41]

    All of the substantive relief is declaratory, and for the reasons stated, the Court cannot and should not entertain those declarations. It will now be for the parties to determine the steps that they wish to take to effect their settlement. I will also hear them shortly as to what orders they wish to make in the substantive proceedings.

21. [42]

    Accordingly:

    1. (1)

       In proceedings number 00213045/2014 the Court orders that the plaintiff’s notice of motion filed 23 July 2015 be dismissed.

    2. (2)

       In the proceedings that were commenced by the summons filed on 29 July 2015, the Court:

22. [43]

    Counsel for the defendants, Mr Dawson, seeks his clients’ (including Citibank’s) costs of the plaintiff’s notice of motion and the summons on the basis that the position he articulated on their behalf has been vindicated by the Court’s judgment.

23. [44]

    The solicitor for the plaintiff seeks to resist that order. First, he points to the course of the mediation and the correspondence that followed it. In particular he contends that the question of whether any part of the payment might be treated as an employee termination payment was not agitated at the mediation. As my judgment makes clear, that is a contestable issue that I consider to be ultimately irrelevant. The recorded agreement made it clear that the parties deferred any question of taxation.

24. [45]

    Second the plaintiff contends that in effect his client had no choice but to approach this Court once the dispute broke out. I disagree. Ultimately what underlay all of this appears to be a contention that the position of the defendants that tax appears to be payable, or is at least arguably payable, was not pursued bona fide. The effect of my judgment is that there is a bona fide basis for believing that tax was payable. Further, the proposition that it was inappropriate to approach this Court to seek declaratory relief to resolve that was made clear to the plaintiff and was certainly reiterated by the defendants in the directions hearing last Friday.

25. [46]

    The course of that directions hearing involved both the defendants, and to an extent the Court, inviting the plaintiff to consider interim arrangements so that he could pursue new employment, obtain the undisputed amount of the payment, and allow an orderly process for the resolution of the issue as to whether any tax was truly payable on the payment to unfold. It is clear that he declined to take that course. Instead, having pursued the matter, and having had his position rejected, there is simply no other course to take than to require him to pay the defendant’s costs. Given that the notice of motion sought the joinder of Citibank, it is clear that it is entitled to the costs of its notice of motion as well.

26. [47]

    Accordingly:

    1. (1)

       In proceedings no 00213045 of 2014 the Court orders the plaintiff to pay the costs of the defendants and Citicorp Pty Ltd of the notice of motion dated 23 July 2015;

    2. (2)

       In the proceedings commenced by the summons filed on 29 July 2015 the Court orders the plaintiff to pay the defendants’ costs of the summons; and

    3. (3)

       The Court orders that proceedings no 00213045 of 2014 be adjourned for mention before a Registrar at 9:00am on 24 August 2015.

27. [48]

    Given the discrete nature of the notice of motion it is appropriate that the costs of the notice of motion be payable forthwith. Accordingly: