E Group Security Pty Ltd v Chief Commissioner of State Revenue (No 3) [2023] NSWCA 63

Background

In the Supreme Court proceeding below, the respondent (“E Group”) sought review of payroll tax assessments that were issued by the Chief Commissioner. The assessments were issued by the Chief Commissioner on the basis that he had determined E Group was an “employment agent” (within the meaning of that term in s. 37 of the Payroll Tax Act 2007) and liable for payroll tax on payments made to its service providers.

The key legal issue in the proceeding below was whether the arrangements between E Group and its clients (or, alternatively, the arrangements between E Group and its related entities) were “employment agency contracts” within the meaning of that term in s. 37 of the Payroll Tax Act 2007.

The primary judge (Ward CJ in Eq, as her Honour then was) allowed E Group’s review at first instance, finding that:

1. E Group was not an “employment agent” because it did not procure the services of the security guards in and for the conduct of the business of its clients;
2. and in relation to the Chief Commissioner’s alternative contention, the related entities did not procure the security guards for E Group but, rather, facilitated E Group’s provision of services to its clients.

The Chief Commissioner successfully appealed the primary judge’s second finding (in relation to the alternative contention regarding the related entities).  That appeal was allowed, with costs.

In relation to the costs of the Supreme Court proceeding, the Court of Appeal set aside the costs order made by the primary judge. and ordered that the Chief Commissioner should pay 50% of the plaintiff’s costs of the proceeding below, because of the following three factors:

1. the Chief Commissioner lost on his primary claim, which dominated the proceeding below;
2. the Chief Commissioner’s failure to cross-examine witnesses on many of the documents which were heavily relied upon in the appeal;
3. and the Chief Commissioner did not appeal the primary judge’s decision in respect of one of the financial years.

The Chief Commissioner applied to vary that costs order, relying on a Calderbank letter dated 12 January 2021 in the proceeding below (“Settlement Offer”). In the Settlement Offer, the Chief Commissioner offered to settle the proceeding on the basis that the primary tax payable by E Group would be reduced by $859,098.78 (with a proportionate reduction in the market interest payable thereupon) and the premium component of interest payable, then amounting to $964,441.40, would be remitted in full.  By the Settlement Offer, the Chief Commissioner agreed to accept $3,366,284.89 in full and final settlement of the proceeding.

The Chief Commissioner sought to vary the Court of Appeal’s costs order by seeking that, from 12 January 2021 (being the date of the Settlement Offer), E Group be ordered to pay the Chief Commissioner’s costs of the proceeding below (either on an indemnity basis or the ordinary basis), or alternatively, that each party bear its own costs of the proceedings below.

The Chief Commissioner’s application to vary the costs order was the subject of this decision.

Submissions

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

The Chief Commissioner asserted that E Group acted unreasonably in not accepting the Settlement Offer, emphasising the offer contained a substantial compromise of approximately $1.8 million, and E Group had all the necessary evidence before it to conclude that it would likely fail on its substantive arguments.  
E Group noted that, as a result of the Court of Appeal’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 had ended up better off than under the Settlement Offer.

E Group acknowledged that, after the accrual of the premium component of interest, it owed more at the conclusion of the appeal than it would have owed if it had accepted the Settlement Offer. However, it contended that a significant portion of the accrual of the premium component of interest happened for reasons outside of its control – in particular, the Chief Commissioner amended the grounds of appeal which prolonged the duration of the proceeding, resulting in further interest accruing.

Decision

Griffiths AJA delivered the main judgment, with which Brereton JA and Simpson AJA agreed.

Griffiths AJA noted that there is no presumption that, if a party rejects a Calderbank offer and subsequently does not obtain a more favourable judgment, it will necessarily pay indemnity costs from the date of the offer. Instead, the offering party must demonstrate that the other party’s rejection of the offer was “unreasonable”. In this regard, E Group’s response to the Settlement Offer must be assessed as at the time that the Settlement Offer was made, and not with the benefit of hindsight resulting from a known outcome recorded in a judgment.

Griffiths AJA, citing Ward CJ in Eq’s decision on costs in the proceeding below, then provided a list of principles relevant to determining whether a party behaves “unreasonably” in the context of non-acceptance of an offer. They include, relevantly:

1. the stage of the proceeding at which the offer was received;
2. the time allowed to the offeree to consider the offer;
3. the extent of the compromise offered;
4. the offeree’s prospects of success assessed as at the date of the offer;
5. the clarity of the offer; and
6. whether the offer foreshadowed an application for indemnity costs if the offer was rejected.

Griffiths AJA accepted E Group’s submission that the Settlement Offer was not a compromise of its liability to pay primary tax, and that while there was some compromise regarding interest, this was largely because of the proceeding being prolonged.

Griffiths AJA considered that “the reasonableness of E Group’s non-acceptance of the Settlement Offer should take into account the fact that interest accrual was a risk for both parties”: when the Settlement Offer was made, E Group faced the risk that it could lose on primary tax and have to bear interest, but that alternatively, it could win on primary tax and be paid interest at the market rate on the refunded amount.

Furthermore, Griffiths AJA noted:

1. the Chief Commissioner failed in the proceeding below on an issue which “dominated” that proceeding, and “the issue on which the Chief Commissioner ultimately succeeded on appeal received relatively little attention below”;
2. the Settlement Offer focused on the alleged “short-comings” of E Group’s case (which were all directed to the contention on which the Chief Commissioner failed); and
3. there was no mention in the Settlement Offer of the basis on which the Chief Commissioner ultimately succeeded in this Court (which was his alternative contention in the proceeding below).

Accordingly, Griffiths AJA ultimately found that that it was not unreasonable for E Group to not accept the Settlement Offer.

Brereton JA, in a separate judgment, emphasised that a party who wishes to benefit from the presumption to depart from what would otherwise be the costs position must make an Offer of Compromise in accordance with the rules, rather than a Calderbank offer. Brereton JA warned that courts “should not too readily allow the requirements of the rules to be circumvented by resort to Calderbank offers”

Orders

1. Order (2) dated 13 December 2022 is affirmed.
2. The appellant pay the respondent’s costs of its unsuccessful application to have Order (2) varied.

Link to the decision