Howlett v Saggers

1 Before me this morning is an argument as to the cost orders which should be made consequent upon the reasons for judgment which I delivered in this matter on 8 February 2002. 2 In the proceedings the Plaintiff ("Digital") claimed an account of profits or, alternatively, equitable compensation for breaches by the Defendants, Messrs Harris and Eden, and the company of contractual, statutory and fiduciary duties of loyalty as employees of Digital. Digital also claimed consequential relief against Mr Harris' company ("Juice") and exemplary damages against all Defendants. 3 Digital alleged that Messrs Harris and Eden had breached their fiduciary duties by diverting ten specific business opportunities from Digital to Juice while they were still employed by Digital. Digital further alleged that Mr Harris had misappropriated its confidential information, being information contained in a document called "On-line Advertising Strategy" which Mr Harris had sent to Juice. 4 Digital's expert accountant quantified Digital's damages as between $391,554 and $587,953, including damages for misuse of confidential information. These calculations were based essentially upon estimates by Mr Heil, Digital's Director, of the value of the projects diverted to Juice. 5 Ultimately I found that of the ten projects said to have been diverted, only six were established by the evidence to have been wrongfully diverted and one of these projects produced no loss to Digital or profit to Juice. The gross profits from these projects for which the Defendants were accountable was less than $40,000. In addition, I found that Mr Harris was liable to Digital for misuse of confidential information in the sum of $11,000. Finally, I awarded exemplary damages against Messrs Harris and Eden in the sum of $10,000 each. 6 It will be seen that the result obtained by Digital in the proceedings is far below the range of amounts it was claiming, and is far less than the threshold of $225,000 referred to in Pt 52A r.33(2)(f)(ii). That rule provides that in proceedings for recovery of a debt, damages or other money commenced in the Common Law Division or entered in the Commercial List after 1 October 1997, where the plaintiff recovers a sum not more than $225,000, the plaintiff shall not be entitled to payment of his or her costs of the proceedings unless it appears to the Court that the plaintiff had sufficient reason for commencing or continuing proceedings in the Court. 7 The first question which has been argued before me is whether Digital had sufficient reason for commencing these proceedings "in the Court" . Construction of Pt 52A r.33(2)(f)(ii)

8 Mr Allen, who appears for the Defendants, concedes that the novelty and difficulty of the question as to whether exemplary damages can be awarded for breach of an equitable duty warranted the proceedings being commenced in the Supreme Court rather than in the District Court or the Local Court: see, for example, Minehan v Clarke (1870) 9 SCR 227. However, Mr Allen draws attention to Pt 52A r.33(1) which applies the rule to proceedings in the Common Law Division or entered into the Commercial List. Mr Allen says that the words of r.33(2), namely, "sufficient reason for commencing proceedings in the Court" must be construed as meaning "sufficient reason for commencing the proceedings in the Commercial List of the Supreme Court", that being one of the two divisions of the Court referred to in paragraph 1 of the rule, rather than in the General List of the Equity Division. He says that Digital has not demonstrated any sufficient reason for entering these proceedings in the Commercial List so that I cannot exercise any discretion under r.33(2) to give any costs to Digital. 9 I am unable to accept this submission. The question upon which the Court must be satisfied under Pt 52A r.33(2) is not whether there was a sufficient reason for commencing proceedings in the Common Law Division or in the Commercial List of the Supreme Court; it is whether there was a sufficient reason for commencing the proceedings in the Supreme Court at all. The rule, by referring only to the Common Law Division and the Commercial List, is intended to exclude from its operation the General List of the Equity Division. That is because it is sometimes necessary to bring proceedings in the Equity Division even though the amount in issue is small, the reason being that inferior courts do not have the jurisdiction to grant the full range of equitable relief to which the plaintiff may be entitled. 10 The purpose of Pt 52A r.33 is to discourage litigants from commencing proceedings in the Supreme Court when an inferior court has sufficient jurisdiction to deal with the claim, so that parties may litigate their disputes with the least possible expense. Proceedings in the Supreme Court inevitably involve higher costs than parties may expect to incur in an inferior court. It is for this reason that r.33(2) fixes minimum amounts of recovery as criteria for awarding costs by reference to various dates. Those dates and those amounts reflect the monetary limits of the jurisdictions of inferior courts at various times, so that the Court is able to exercise its discretion as to whether to award costs in proceedings in the Supreme Court by reference to whether those proceedings could properly have been commenced and maintained within the jurisdictions of inferior courts at the relevant times. 11 In none of the authorities to which I have briefly referred is there any indication that the criterion for the exercise of discretion under r.33(2) is: which Division of the Supreme Court was the appropriate Division in which to maintain the proceedings. In Minehan v Clarke it was held that a sufficient reason for commencing proceedings in the Supreme Court was demonstrated if the matter in contest involved difficult questions of law or serious and complicated questions of fact. In other words, the criterion for the exercise of discretion was the importance or difficulty of the issues. 12 To that effect, also, is the reasoning of Greg James J in Howlett v Saggers [1999] NSWSC 445. His Honour held in that case that where the issues are legally complex and novel, where the argument is sophisticated and vigorous, and where the resolution of issues is likely to produce valuable procedural or substantive precedents, costs might be awarded in the sound exercise of discretion under r.33(2). The rationale for that decision is that, in cases such as his Honour refers to, the value of having a precedent set by the Supreme Court rather than an inferior court justifies the proceedings being commenced in this court rather than in the inferior court. 13 I am satisfied that, because of the difficulty and novelty of the question whether exemplary damages for breach of fiduciary duty can be awarded by a court in Australia, it was entirely appropriate for these proceedings to be brought by Digital in the Supreme Court rather than in an inferior court. I am satisfied that a "sufficient reason for commencing the proceedings in the Court" has been shown for the purposes of Pt 52A r.33, so that it is appropriate to make some order for payment of Digital's costs. Whether costs of all or some issues

14 The real questions are whether an order should be made that the Defendants pay the whole or only some part of Digital's costs, and whether there should be an order for indemnity costs. 15 Mr Allen points out that Digital has certainly not succeeded upon all of the issues which it raised. Indeed, as I have observed, of the ten projects said to have been wrongfully diverted Digital succeeded in establishing that only six had been diverted. Digital failed on certain subsidiary issues such as whether or not Messrs Harris and Eden were restrained by a restrictive covenant in an employment contract, although that issue took relatively little time. 16 Digital failed also on the issue as to what was the appropriate method of calculating its loss or the amount to be awarded by way of equitable compensation or an account of profits. 17 Mr Allen submits that it is not necessary to identify the costs attributable to each of the issues in the case: I should adopt, he says, a broad brush approach. I agree that the authorities show that such a broad approach is quite justified. It is not appropriate in this case to pick through each of the issues raised and to endeavour to apportion costs of any particular issue, particularly where there is a common substratum of facts and where there is a common issue as to the credit of the respective parties which underlies all or most of the contested issues. 18 In all these circumstances, including the fact that this trial lasted for some four days and that Mr Allen, on behalf of the Defendants, conceded liability in respect of some of the contested claims only in final submissions, I think it is inappropriate to deprive Digital of the normal costs order which would be made where it has achieved success on most of its claims against the Defendants. 19 I think that, prima facie, the costs of the proceedings should follow the event and that the Defendants should pay Digital's costs of the proceedings. Whether indemnity costs

20 The question then arises whether the costs should be assessed on an indemnity basis. Mr Bulley, who appears for Digital, submits that indemnity costs are awarded when the justice of the case requires and where there is some special or unusual feature in the case which justifies the Court in departing from the usual course. He relies upon Re Wilcox: Ex Parte Venture Industries Pty Ltd (No.2) (1996) 141 ALR 727 and Oshlack v Richmond River Council (1998) 193 CLR 72 in which Gaudron and Gummow JJ said that "some relevant delinquency on the part of the unsuccessful party may justify an order for costs on an indemnity basis" : at page 89. 21 Mr Bulley submits that a departure from the usual order as to costs is justified in this case because of the nature of the Defendants' conduct which brought about an award of exemplary damages. As I have held, that conduct was fraudulent and deliberate. In those circumstances, Mr Bulley submits that there is "some relevant delinquency" on the part of the Defendants within the scope of the words used by Gaudron and Gummow JJ in Oshlack , such as to justify an indemnity costs order. 22 On the other hand, Mr Allen relies on the distinction between awards of damages and awards of costs. He points to what was said by Bergin J in Walter Vignoli v Sydney Harbour Casino Pty Ltd (No.2) [1999] NSWSC 1227 at paragraph 29. There her Honour said: "The award of aggravated damages is to compensate the plaintiff for the heightened injury caused by the unjustifiable conduct of the defendant. Cassell & Co Ltd v Broome [1972] AC 1027 at 1124. An award of indemnity costs is to compensate a party for the incursion of costs in fighting or preparing to fight a case brought by a party who, properly advised, should have known [that there was] no chance of success: Fountain Selected Meats (Sales) Pty Limited v International Produce Merchants Pty Limited & Ors (1988) 81 ALR 397 at 401. They are distinct awards." 23 With great respect, I agree entirely in what was said by Bergin J. An award of damages is essentially compensatory. It compensates the plaintiff for injury which a defendant has inflicted. An award of exemplary damages, on the other hand, is not compensatory: it expresses the disapproval of the Court and of the community of the conduct which founded the plaintiff's cause of action, and is intended to punish the defendant for that conduct. 24 However, it is no function of an award of costs to punish a defendant for the conduct which has founded the plaintiff's successful cause of action. The purpose of an award of costs is to compensate the successful party for having had to come to court to vindicate his or her cause of action. If indemnity costs are awarded, it is to punish the defendant, not for the wrongful conduct which underlies the cause of action, but for the way in which that party has conducted the case. So, for example, where a party has defended a case when, properly advised, that party should have conceded his or her position as hopeless and should have refrained from putting the plaintiff to the costs of prosecuting the case, or where a financially stronger party has patently and deliberately protracted proceedings for the purpose of multiplying costs and wearing down the other side in the hope of forcing an out-of-Court capitulation, then the Court may express its disapproval of what is, in substance, a misuse of the Court's process by awarding indemnity costs: see, for example, Latoudus v Casey (1990) 170 CLR 534 at 543 and Ohn v Walton (1995) 36 NSWLR 77 and Vignoli (supra). 25 In the present case, the Defendants, properly advised, should have known that they had no chance of success in defending those claims for wrongful diversion of profits which were conceded by Mr Allan in his final submissions. Those claims are the claims in relation to Australian Jazz Festival, Billbergia, Ryan & Waldock and Marchese Partners. 26 Digital has been put to unjustifiable expense in preparing and presenting its case in respect of those claims. In my view, Digital should be compensated for that expense by an award of indemnity costs in respect of such costs as can be identified as going to those issues. Otherwise, in my view, the conduct of the Defendants' case has been unexceptionable, so that in relation to all other issues, costs should be awarded on a party/party basis.

27 Finally, I come to the question whether there should be any allowance made in the costs orders in view of the fact that, as the evidence reveals, an offer of compromise was made by the Defendants to Digital prior to the conclusion of the case. 28 The proceedings were commenced in March 2000. The trial began on 26 November 2001. On 27 November 2001 the Defendants made an offer in writing that judgment be entered in favour of Digital for the sum of $125,000, but that the Defendants pay $80,000 in full and final satisfaction of that judgment, such sum to be paid by way of monthly instalments of $5,000. It was proposed that if there were any default in payment on the part of the Defendants, Digital would be at liberty to enforce the balance of the amount for which judgment had been entered. Finally, it was proposed that there be no order as to costs and that the proceedings be dismissed. 29 It will be seen that the amount offered by the Defendants was, at its minimum, $80,000 without interest and that that sum was, in effect, inclusive of Digital's costs of the proceedings. The offer was made on the second day of the trial. 30 I do not think that Digital was unreasonable in rejecting an offer in that amount, on those terms and at that stage of the trial. Eighty thousand dollars or even $125,000 is possibly more than Digital will receive in terms of compensation, interest and costs after taxation but then again, it might be less. It would have been extremely difficult for Digital to form any realistic assessment at that stage of the trial as to whether a sum of $125,000 or $80,000, paid by instalments, would approximate the result which it might achieve if the case went to a final determination. 31 The rejection of that offer being, in my view, not unreasonable, I do not propose to make any deduction from the costs otherwise to be awarded against the Defendants by reason of the offer having been refused.

32 The orders of the Court in relation to costs therefore will be:

• the Defendants are to pay on an indemnity basis the costs of the issues relating to the claims in respect of which it conceded liability on the last day of the trial;

• otherwise, the Defendants are to pay Digital's costs of the proceedings on a party/party basis. 33 In addition to the costs orders which I have just pronounced, I make orders in accordance with the Short Minutes of Order signed by the parties' representatives, initialled by me and placed with the papers. 34 Exhibits may be returned. 35 I order that the orders made by Hunter J on 28 July 2000 regarding payment of security for costs by Digital be discharged, and that Digital be entitled to be repaid all amounts paid by way of security with the Defendants to provide all necessary assistance to ensure that such funds are released forthwith. - oOo -

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