EIFY Systems Pty Ltd v 3D Safety Services Pty Ltd

Supreme Court of NSW|2018-03-16|Before: McDougall J

Solicitors: Proctor Phair Lawyers (Plaintiff) Henry Davis York (Defendants) File Number(s): 2012/323876

Judgment

HIS HONOUR: In these reasons, I deal with the costs consequences of my principal judgment given on 28 September 2017: EIFY Systems Pty Ltd v 3D Safety Services Pty Ltd [2017] NSWSC 1310.

Background

I shall assume that the reader of these reasons has had the misfortune to read my earlier reasons, and shall, so far as possible, avoid repetition of what I there said. However, there are a number of points, emerging from my earlier reasons, that require summary statement: 1. the plaintiff's case was prepared and conducted in an extraordinarily inefficient and disorganised way. 2. At least partly in consequence, the hearing was prolonged, and indeed required double the number of hearing days initially estimated and allotted. 3. My earlier reasons were, on the face of things, unconscionably long, comprising 465 paragraphs over 117 pages. That length reflected in no small part the way in which the plaintiff's case had been prepared and presented, the inadmissible nature of much of the evidence on which the plaintiff sought to rely, and the need to rule on a belated application for leave further to amend that the plaintiff made in the course of the hearing. 4. The plaintiff produced a court book comprising some 27 volumes, which bore all the hallmarks of last-minute preparation unguided by any degree of thought as to what should and should not be included. The court book was not organised chronologically; it contained unnecessary multiple copies of many documents; and contained reams and reams of documents that had no, or at best marginal, relevance.

The parties' competing contentions as to costs

The plaintiff sought to blame the defendants for the prolonged hearing. In consequence, whilst accepting that it should pay some of the defendants' costs, it contended that its responsibility should be limited to no more than 25% of those costs.
The defendants sought an order that the plaintiff pay the whole of their costs. They submitted that the plaintiff's conduct was such that an order for costs to be assessed on the indemnity basis would be justified. They estimated that their total costs, on a solicitor and client basis, would be a tad under $2 million. They said that the cost of preparing applications for assessment, and having costs assessed, would be disproportionately high, particularly taking into account the plaintiff's demonstrated propensity to challenge, so far as it could, every assessment of costs that it had been ordered to pay earlier in the proceedings. Thus, the defendants sought that in lieu of an order for costs to be assessed on the indemnity basis they should have a gross sum costs order, the amount of which they specified at $1.2 million.
Further, the defendants sought an order that Mr Patrick Culbert, the principal of the plaintiff, the person who had quite clearly directed its conduct of the litigation, and the person who stood to benefit from any success, should be made jointly and severally liable with the plaintiff for any costs that might be ordered against the plaintiff.

The plaintiff should pay the defendants' costs

I do not accept the plaintiff's submission that its responsibility for costs should be limited to 25% of those incurred (assessed on the ordinary basis).
I do accept that, as the plaintiff submitted, there were aspects of the defendants' evidence that were unsatisfactory (and, in particular instances, untrue). However, I do not accept the plaintiff's submission that those matters were of such significance as to justify some departure from the ordinary position that, whilst costs are in the discretion of the court (see s 98(1) of the Civil Procedure Act 2005 (NSW)), ordinarily they should "follow the event" (see UCPR r 42.1). In my view, this is a case where it is inappropriate to seek to define the relevant "event" by reference to particular issues, whether of fact or of law, that were raised and disputed. The simple fact is that the plaintiff put its case in various ways, and failed on each of them. In my view, that failure is the relevant event, and it is that consideration which should guide the court in exercising the costs discretion in this case.
Further, in my view, to award the defendants only a proportion of their costs would ignore the fact, which in my view is starkly apparent, that the conduct of the litigation was rendered far more complex and expensive than necessary because of the approach that the plaintiff had taken to the preparation and presentation of its case. Lest it should be thought that I am making over-much of an ill-prepared and shoddily constructed court book, I refer the reader of these reasons to the other unsatisfactory aspects of the plaintiff's case that received more detailed attention in my earlier reasons.
Further, although I do not wish to make these reasons any longer than they need be, I should record that I do not accept the plaintiff's submission that the defendants' approach to two particular issues on which the plaintiff placed much emphasis (whether Messrs Conacher and Morrow of the defendants had registered on the plaintiff's system, and whether the defendants, contrary to their pleaded case, had utilised the plaintiff's confidential information for their own purposes) are correct.
As to the first of those matters: I did not accept the evidence of Messrs Conacher and Morrow as to registration. But that was merely one aspect of the case, by no means one that could be said to be dominant or severable. As to the second: the submission misconceives both the evidence and the actual nature of the case that the defendants had pleaded and sought to prove, and on which they succeeded.
As I have said, I am satisfied that the plaintiff should be ordered to pay the defendants' costs, and not merely some specified percentage of those costs.
Were it necessary to do so, I would conclude, in addition, that at least part of those costs should be assessed on the indemnity basis. In my view, the plaintiff's conduct of its case was so derelict as to amount to "relevant delinquency" for the purposes of enlivening the discretion to order costs to be assessed on the indemnity basis (see Oshlack v Richmond River Council [1] , in particular in the joint reasons of Gaudron and Gummow JJ at [44]).

The defendants should have a gross sum order

The litigation (proceedings were commenced in 2012, stayed for 20 months because the plaintiff did not comply with an order for security costs, and ultimately not brought on for trial until July 2017) does not have a happy history. I will not repeat what I have said above and in my earlier reasons as to the unsatisfactory manner in which the plaintiff's case was "pleaded", prepared and presented. I have no doubt that those matters prolonged the time taken before a hearing date could be allotted, and caused the defendants to spend more than otherwise they would have done on costs.
More significantly for present purposes, I am satisfied that the process of assessment of costs would be both expensive and time consuming. The defendants' evidence is that the preparation of an application to have costs assessed would itself cost over $40,000, that the process of assessment would take 10 to 12 months, and that the review of any assessment could take a further 10 to 12 months.
The likelihood of challenges to any assessment is very real. The plaintiff has on a prior occasion challenged, so far as it could, an assessment of costs ordered in favour of the defendants (that challenge pursued from assessor to review panel to the District Court to the Court of Appeal [2] ). The defendants' costs in the District Court and the Court of Appeal came to about $75,000: this, in respect of an assessment of $224,000 (that is to say, their costs were one-third of the amount of the costs being challenged).
The plaintiff's submissions in opposition to the application for a gross sum order take the point that the plaintiff is entitled to and would wish to challenge any assessment that the defendants propound.
As I have said, the defendants seek a gross sum order of $1.2 million, as against total costs incurred of almost $2 million. Although the amount of costs incurred may seem very large, I am satisfied that the total must reflect, in no small part, the difficulty of meeting a case propounded in the inefficient and unsatisfactory way that may be gleaned from what I have said above and in my earlier reasons.
Further, in this context, I take into account that of the total of $500,000 that the plaintiff was ordered to provide by way of security for costs, almost half -$224,000 - has been consumed by costs orders already made (and that does not take into account the costs of the challenges to which I have referred earlier). The plaintiff has no assets, and has made very substantial operating losses over the last five years.
The defendants' solicitor estimates that on the indemnity basis, the defendants would recover $1.89 million and, on the ordinary basis, $1.6 million, of the total costs incurred to date. Those estimates have not been challenged by contrary evidence. The amount of the gross sum order for which the defendants contend is 35% below the higher, and 25% below the lower, of those estimates.
I am comfortably satisfied that assessing a gross sum order in the amount of $1.2 million would not cause any disadvantage to the plaintiff. Putting the matter slightly differently, I accept following propositions: ordinarily, costs are to be assessed if they are not agreed; the party against whom costs assessed has a right to challenge the amount of costs claimed; and depriving a party of that right is a serious matter. I conclude, nonetheless, that on the evidence, depriving the plaintiff of that right in this particular case would not cause it any financial detriment.
In reaching that conclusion, I take into account that the defendants are foregoing a strong claim for an order that at least some of their costs - I venture to say, at least those of the hearing - should be assessed on the indemnity basis. That of itself helps to offset any detriment that the plaintiff may suffer by being deprived of its right to have costs assessed.
I take into account, also, the undoubted fact that the process of assessment will be both expensive and time consuming. I conclude, based on history, that it is more likely than not that the plaintiff will contest the assessment, will challenge any amount that is ultimately assessed, and will take those challenges as far as it can, thereby causing both further expense and further delay. Of course, if the plaintiff were not to take that approach and were instead to accept the outcome of the assessment process, the result in all probability will be that it will have a liability well in excess of the gross sum amount for which the defendants contend.
Balancing all those considerations, I conclude that in this case it is appropriate for costs to be assessed in the gross sum of $1.2 million.

No order should be made against Mr Culbert

It may be accepted that Mr Culbert is the guiding mind of the plaintiff, the person who has directed its conduct of the litigation, and the person who stood to benefit by any success. That of itself is not in my view sufficient to justify an order that he be personally liable for the costs. Making him personally liable for that reason alone would effectively pierce the veil of incorporation, and set aside the law's recognition of individual and distinct corporate personality.
The defendants lay stress on the fact that, in the course of opposing their application for security for costs, Mr Culbert swore an affidavit in which he deposed to the extent of his assets and offered to make them available, so far as they extended, to satisfy any costs order that might be made in favour of the defendants. In my view, that does not provide a reason for making the order now sought. It points the other way. The defendants could have had the benefit of that offer by accepting it. They chose instead to pursue their application for security for costs. Having done so, it is not entirely consistent for them to turn around and seek to achieve, by order of the court, that which they could have obtained five years earlier by agreement.
Likewise, the defendants' complaint that Mr Culbert has apparently breached an undertaking that he would not seek further to encumber his assets goes nowhere. Even if that were correct (and an application of this nature is not the way in which it should be tested), it is irrelevant, substantially for the reasons I have just given.

Costs of this application

The plaintiff's primary position has failed. The defendants' application for a gross sum costs order has succeeded, but their application for a costs order against Mr Culbert has failed. In the ordinary way, I would have allowed the defendants some portion of their costs of this application. However, the application was one dealt with on the papers, and the costs incurred in respect of it are unlikely to be, in the context of a $2 million bill, significant. In the circumstances, I think it appropriate to order that the costs of the costs application be costs in the cause, so that in effect the defendants' costs will be picked up by the gross sum order.
I make the following orders: 1. order the plaintiff to pay the defendants' costs of the proceedings. 2. Order that those costs be assessed in the gross sum of $1,200,000. 3. Order that costs in relation to the costs applications be costs in the cause.

Endnotes

(1998) 193 CLR 72.
See eInduct Systems Pty Ltd v 3D Safety Services Pty Ltd [2015] NSWCA 284. 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. Decision last updated: 19 March 2018

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