Chief Commissioner of State Revenue v E Group Security Pty Ltd (No 3)

1. [1]

   BRERETON JA: As explained in the judgment of Griffiths AJA, which I have had the benefit of reading in draft and with which I agree, the Chief Commissioner applies to vary Order 2 made on 13 December 2022, so as to (at least) exonerate the Commissioner of liability for any of the costs of the proceedings at first instance, and (at best) to require E Group Security to pay the Commissioner’s costs of those proceedings, and on an indemnity basis, on the basis of a Calderbank offer made by the Commissioner on 12 January 2021.

2. [2]

   While it is relevant that a party betters a Calderbank offer, that does not found any presumption as to a departure from what would otherwise be the position in respect of costs. A party who wishes the benefit of such a presumption must make an Offer of Compromise in accordance with the rules, and the Court should not too readily allow the requirements of the rules to be circumvented by resort to Calderbank offers.

3. [3]

   In order to evaluate whether a party has bettered an offer, it is necessary to compare the results at the same dates. In respect of primary tax, it was E Group and not the Commissioner who ultimately bettered the offer. While the total liability of E Group is now apparently $4.2 million (as at 9 February 2023), a comparison with the sum of $3.366 million as at 12 January 2021 does not establish that the Commissioner bettered the offer by $800,000 – or at all – where a significant component of the greater amount is interest which has accrued since January 2021. Moreover, as Griffiths AJA explains, the proceedings at first instance were dominated by issues on which the Commissioner failed. The Commissioner’s ultimate success on appeal was on an issue which received only slight attention at the trial. Indeed, as the Commissioner submits, “E Group Security’s success before the primary judge arose because the primary judge was not taken to many of the relevant documents.” That is not a matter for which E Group is responsible.

4. [4]

   In my opinion, in those circumstances, the Calderbank offer was not such as to displace E Group’s entitlement as a successful plaintiff to half of its costs at first instance – only half being appropriate, because (ultimately) E Group’s success was only partial. I agree with the orders proposed by Griffiths AJA.

5. [5]

   SIMPSON AJA: I agree with Griffiths AJA. I also agree with the additional observations of Brereton JA.

6. [6]

   GRIFFITHS AJA: On 13 December 2022, the Court delivered its principal judgment in this matter (Chief Commissioner of State Revenue v E Group Security Pty Ltd (No 2) [2022] NSWCA 259 (principal judgment)) and made the following orders:

7. [7]

   The leave granted by Order 3 was exercised by the appellant (Chief Commissioner) and the Court subsequently made orders for the parties to file written submissions and for the application to be determined on the papers. The parties filed written submissions and relied on the following affidavits:

   1. (1)

      An affidavit of Thomas Millet dated 10 February 2023 for the appellant.

   2. (2)

      An affidavit of Charbel Azzi dated 10 March 2023 for the respondent (E Group Security).

8. [8]

   The Chief Commissioner sought to vary Order 2 of this Court’s orders dated 13 December 2022, such that it would read in any of the three indicated ways (amendments underlined):

9. [9]

   In support of this proposed variation, the Chief Commissioner relied on a Calderbank letter dated 12 January 2021 in the proceeding below (Settlement Offer). There, the Chief Commissioner offered to settle the proceedings on the basis that the primary tax payable by E Group Security would be reduced by $859,098.78 (with a proportionate reduction on the market interest payable thereupon) and the premium component of interest payable, then amounting to $964,441.40, would be remitted in full. Thus, the Chief Commissioner agreed to accept $3,366,284.89 in full and final settlement of the proceedings.

10. [10]

    The Chief Commissioner submitted that, following the orders made in the principal judgment, E Group Security was liable, as at 9 February 2023, to pay over $4.2 million (including costs) to the Chief Commissioner. Thus, it contended that E Group Security would have been more than $800,000 better off had it accepted the Settlement Offer.

11. [11]

    There is no presumption that a party who does not accept a Calderbank offer and does not obtain a more favourable judgment will necessarily pay indemnity costs from the date of that offer: Leichhardt Municipal Council v Green [2004] NSWCA 341 at [19]; Tati v Stonewall Hotel Pty Ltd (No 2) [2012] NSWCA 124 at [9]. The Chief Commissioner bears the onus of demonstrating that E Group Security’s non-acceptance of the Settlement Offer was “unreasonable” in all the circumstances.

12. [12]

    In E Group Security Pty Ltd v Chief Commissioner of State Revenue (No 2) [2021] NSWSC 1296 (being the decision on costs in the proceeding below), Ward CJ in Eq helpfully summarised some relevant principles at [59]–[60]:

13. [13]

    In asserting that E Group Security acted unreasonably in not accepting the Settlement Offer, the Chief Commissioner emphasised the following six matters. First, that the offer was received three weeks before the commencement of the final hearing before Ward CJ in Eq. Secondly, the offer was open for 14 days. Thirdly, the offer contained a substantial compromise of approximately $1,800,000. As at the date of the Settlement Offer, the amount of tax owing (including interest) was around $5.2 million whereas the Settlement Offer contained an offer to accept about $3.4 million. Fourthly, the offer was expressed in clear terms. Fifthly, an application for indemnity costs was expressly foreshadowed. Sixthly, E Group Security had all the evidence necessary to make an assessment that it would most likely fail on its substantive arguments.

14. [14]

    E Group Security noted that, as a result of this Court’s findings, the primary tax liability was for $2,998,653.83. Accordingly, it submitted there was no compromise in relation to the primary tax because E Group Security has ended up better off than under the Settlement Offer.

15. [15]

    E Group Security’s response to the Settlement Offer must be assessed as the time that the Settlement Offer was made, and not with the benefit of hindsight resulting from a known outcome recorded in a judgment: Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 at [11] per Basten JA (McColl and Campbell JJA agreeing); Krolczyk v Winner t/as J Winner Building Services [2022] NSWCA 196 at [217] per Griffiths AJA (White and Kirk JJA agreeing).

16. [16]

    E Group Security acknowledged that, when regard is had to the accrual of the premium component of interest, the amount it is ultimately liable to pay following this Court’s decision is more than the amount that would have been payable if it had accepted the Settlement Offer. It added, however, that an assessment of whether it acted unreasonably in not accepting it had to take into account that a significant component of the interest accrued was attributable to conduct and events outside its control. The judgment in the proceeding below was published on 22 September 2021 and the Chief Commissioner lodged its notice of appeal on 22 December 2021 (ie the last possible day). On 15 March 2022, the appeal was listed for hearing on 23 June 2022 but on 3 May 2022 the Chief Commissioner sought leave to amend the appeal grounds. The hearing of those new grounds (upon which the Chief Commissioner was unsuccessful before a differently constituted Court of Appeal) took up all of the allocated hearing day on 23 June 2022. The balance of the appeal was heard on 19 October 2022 and the principal judgment was delivered on 13 December 2022.

17. [17]

    E Group Security also pointed to the potential for interest to accrue as being a risk to both parties, given that E Group Security had paid $810,000 pursuant to a payment plan at the time the Settlement Offer expired and continued to make payments. It said that if it succeeded on the issue of its primary tax liability, it could receive interest on the amount refunded under s 105(1) of the Taxation Administration Act 1996 (NSW).

18. [18]

    The Chief Commissioner submitted that the further accrual of interest between the Settlement Offer and the publication of the principal judgment did not alter the fact that, at the time the Settlement Offer was made, it was a genuine compromise.

19. [19]

    I accept E Group Security’s submission that the Settlement Offer did not represent a compromise of its liability to primary tax. In the unusual circumstances described above (and, in particular, the delay occasioned by the Chief Commissioner’s attempt to amend its appeal grounds), while there was some compromise on the issue of liability to interest, that result is largely due to the effluxion of time caused by the Chief Commissioner’s conduct of the appeal and its attempt to raise new grounds.

20. [20]

    In these circumstances, I consider that the reasonableness of E Group Security’s non-acceptance of the Settlement Offer should take into account the fact that interest accrual was a risk for both parties (see at [17] above). When the Settlement Offer was made, E Group Security faced the risk that it could lose on primary tax and have to bear interest but, in the alternative, it could win on primary tax and be paid interest at the market rate on the refunded amount.

21. [21]

    The following additional matters support a finding that E Group Security’s non-acceptance of the Settlement Offer was not unreasonable.

22. [22]

    When the Settlement Offer was made, the parties’ dispute was directed to the question whether E Group Security was an employment agent. The Chief Commissioner entirely failed on that issue, which issue dominated the proceeding below. As noted in the principal judgment at [31] and [109(1)], the issue on which the Chief Commissioner ultimately succeeded on appeal received relatively little attention below.

23. [23]

    The point is further reinforced by the fact that the five alleged “short-comings” of E Group Security’s case, as particularised in the Chief Commissioner’s Settlement Offer, were all directed to the contention on which the Chief Commissioner failed, namely that the arrangements between E Group Security and its clients were “employment agency contracts”. (This contention was rejected both at first instance and in the earlier decision of this Court: see E Group Security Pty Ltd v Chief Commissioner of State Review [2021] NSWSC 1190 and Chief Commissioner of State Revenue v E Group Security Pty Ltd [2022] NSWCA 115 respectively.)

24. [24]

    Finally, it is also notable that there was no mention in the Settlement Offer of the basis on which the Chief Commissioner ultimately succeeded in this Court, namely that an employment agency relationship existed between E Group Security and its three related entities.

Conclusion

1. [25]

   For all these reasons, I find that it was not unreasonable of E Group Security to not accept the Calderbank offer. I remain of the view that the appropriate costs order in respect of the proceedings below is that the defendant should pay 50% of the plaintiff’s costs of the proceeding (as set out in Order (2) in the principal judgment). The Chief Commissioner should pay E Group Security’s costs of its unsuccessful application to vary the orders.

2. [26]

   Appropriate orders will be made accordingly.