Labelmakers Group Pty Ltd v LL Force Pty Ltd

Solicitor for the First and Second Applicants: Clayton Utz

Counsel for the First, Second, Third, Fourth, Fifth and Sixth Respondents: Mr G T Bigmore QC and Mr S B Rosewarne

Solicitor for the First, Second, Third, Fourth, Fifth and Sixth Respondents: Tottle Partners

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 555 of 2009

BETWEEN: LABELMAKERS GROUP PTY LTD (ACN 114 717 814)

JUDGE: TRACEY J DATE OF ORDER: 21 November 2013 WHERE MADE: MELBOURNE

1. The claims made by the first applicant in the proceeding be dismissed. AGAINST THE FIRST, SECOND, THIRD, FOURTH AND FIFTH RESPONDENTS:
2. There be judgment for the second applicant and the first, second, third, fourth and fifth respondents are jointly and severally liable to pay the second applicant the sum of $2,660,043 together with interest in the sum of $916,002.04.
3. The first, second, third, fourth, and fifth respondents be granted leave to apply for a determination as to what proportions as between themselves each should contribute to their joint and several liability to the second applicant for the judgment sum the subject of order 2 above, any such application to be made within 21 days from this day. ADDITIONALLY AGAINST THE SIXTH RESPONDENT:
4. There be judgment for the second applicant and the sixth respondent pay the second applicant the sum of $1,000. ADDITIONALLY AGAINST ALL RESPONDENTS:
5. There be a stay on the execution of this order and judgment for a period of 21 days from this day. COSTS
6. The first, second, third, fourth and fifth respondents pay the second applicant's costs of the application on an indemnity basis.
7. There be no order for costs against the sixth respondent.
8. The first applicant pay the respondents' costs of its claim relating to its loss of paper sales. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 555 of 2009

BETWEEN: LABELMAKERS GROUP PTY LTD (ACN 114 717 814)

JUDGE: TRACEY J DATE: 21 NOVEMBER 2013 PLACE: MELBOURNE

REASONS FOR JUDGMENT 1 The trial of this proceeding was divided, with issues relating to liability first being dealt with. I found that the individual respondents had been guilty of significant breaches of their fiduciary, contractual and statutory obligations to their employer. I also found that LL Force Pty Ltd ("LL Force") was liable for the same breaches: see Labelmakers Group Pty Ltd v LL Force Pty Ltd (No 2) [2012] FCA 512 ("Labelmakers (No 2)"). The determination of appropriate orders relating to relief and costs was deferred pending determination of the issues relating to liability. 2 In Labelmakers Group Pty Ltd v LL Force Pty Ltd (No 3) [2013] FCA 1059 ("Labelmakers (No 3)") I dealt with the forms of relief to which the applicants claimed an entitlement. No orders were made because it was necessary for the applicants to make an election as to whether they wished to receive equitable compensation or an account of profits. It was also necessary for pre-judgment interest to be calculated. 3 The question of costs remained outstanding.

RELIEF 4 Having considered their position the applicants have elected to receive equitable compensation. The election has been made subject to certain reservations. 5 The first relates to my finding, in Labelmakers (No 3) at [120] that the first, second, third, fourth and fifth respondents should be treated as being jointly and severally liable to the applicants with the caveat that, if any of them sought it, I would be minded to grant them leave to apply for a determination as to what proportions as between themselves each should contribute to satisfy their liability. To this end liberty to apply was granted. No application has yet been made pursuant to this grant of leave. 6 The applicants recorded their understanding that, were such application to be made, and an apportionment made, those five respondents would remain jointly and severally liable to the second applicant for the total sum to which the Court has determined it is entitled. 7 The applicants also maintained that, notwithstanding their election, the respondents would be liable to the second applicant for pre-judgment interest on their capital profits, had the applicants opted to receive an account of profits. 8 The applicants' third caveat was that, if the respondents were successful on an appeal, such that the amount to which they were found to be entitled by way of equitable compensation were to be reduced, they would reserve their right to make a further election based on any reduced amount fixed on by the Full Court. 9 The respondent did not seek to be heard in relation to the applicants' election or the reservations. 10 Orders will be made giving effect to the applicants' election, for damages to be awarded against Ms Leech and for the payment of pre-judgment interest.

COSTS 11 The applicants have sought an order that the respondents pay their costs of the proceeding on an indemnity basis. In making this claim the applicants contended that no distinction was to be drawn between Ms Leech and the other respondents. 12 The respondents accepted that Labelmakers WA was entitled to a costs order against the first to fifth respondents on a party and party basis. They opposed the award of costs on an indemnity basis. They contended that the applicants had no entitlement to a costs order against Ms Leech.

General Principles 13 The Court has a broad and unfettered discretion under ss 37P(6)(d) and (e) and 43 of the Federal Court of Australia Act 1976 (Cth) to award costs in proceedings. That discretion must, of course, be exercised judicially and not arbitrarily or capriciously: see Cretazzo v Lombardi (1975) 13 SASR 4 at 11; Denlay v Commissioner of Taxation (No 2) (2013) 302 ALR 237 at 239. Within that general discretion it has long been accepted that costs will ordinarily follow the event and that a successful litigant will receive costs in the absence of special circumstances which justify the making of some other order: see Ruddock v Vadarlis (No 2) (2001) 115 FCR 229 at 234 (per Black CJ and French J). The "ordinary rule" recognises that a successful party would have incurred costs in prosecuting or defending the proceeding and is entitled to be compensated. Such compensation will normally be paid on a party-party basis. 14 One variant of the usual order which may be warranted in special or unusual circumstances is an order that costs be paid on an indemnity basis. Under such an order the party in whose favour it is made will be compensated fully for all reasonable expenses incurred in the litigation. Any departure from the "ordinary rule" must be warranted having regard to the circumstances of the case. In Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 Sheppard J reviewed a large number of authorities from which he distilled certain principles or guidelines about the awarding of costs. His Honour identified a number of circumstances in which it had been held that the award of indemnity costs was justified. These included: where the misconduct of a party causes loss of time to the Court and to other parties; the proceedings had continued in wilful disregard of known facts or clearly established law; and the undue prolongation of a case by the making of groundless contentions. See at 233. See also Dowling v Fairfax Media Publications Pty Ltd (No 2) [2010] FCAFC 28 at [42]-[45] (per Graham J), [139]-[140] (per Logan and Flick JJ). Sheppard J was at pains to stress that the categories of conduct which might warrant the award of indemnity costs were not and could not be closed.

The parties' submissions - indemnity costs orders against respondents 15 The applicants identified a number of "special" reasons which, they contended, justified the award of indemnity costs in relation to the liability stage of the proceeding. They were that the respondents had: made false denials; pursued unmeritorious defences which they knew to be false; given misleading and untruthful evidence; and called other witnesses to give misleading and untruthful evidence. 16 Such conduct, they submitted, had "wasted many days of the Court's time and occasioned a great deal of additional expense for the Applicants." 17 The applicants also relied on what they said was "the obstructionist approach" adopted by the respondents which had also contributed to the length of the trial and caused additional expense to be incurred. They illustrated this complaint by reference to a notice to admit facts which they had served on the respondents prior to trial. The notice related to six documents and sought admissions about the dates of their creation and their authors. The respondents disputed "all facts specified" in the notice but were later to admit almost all of the relevant facts. 18 Whilst acknowledging that the exercise of the Court's discretion must turn on the peculiar facts of each case in which the discretion falls to be exercised, the applicants sought to rely, by way of analogy, on a number of decisions in which it had been held that, what was said to be less egregious conduct by respondents, justified the award of indemnity costs. These cases were Barrett Property Group Limited v Metricon Homes Pty Ltd (No 2) [2007] FCA 1823, Menkens v Wintour [2011] QSC 53 and Holyoake Industries (Vic) Pty Ltd v V-Flow Pty Ltd (No 2)(2012) 88 ACSR 679. 19 In their written submissions the respondents contended that the circumstances of the present case were such as to place it wholly outside the range of considerations which had been essayed in Colgate-Palmolive and which had been found to support the making of indemnity costs orders. They further submitted that Holyoake Industries (No 2) was distinguishable because the award of indemnity costs in that case had been founded on the failure of the respondents to discover prejudicial documents and the impact this had had on the conduct of the trial and expenses incurred by the applicants. 20 In resisting an order for costs to be paid on an indemnity basis the respondents also referred to offers of compromise which they had made on 13 November 2009 and 17 May 2010. Reference was also to made to a letter from the respondents' solicitors to the applicants' solicitors dated 16 September 2009 in which the respondents offered the applicants open access to working papers and client communications for each print job undertaken by LL Force. The offers of compromise which were attached to the respondents' written submissions were heavily redacted. Full copies were provided to the Court as attachments to the applicants' reply submissions. The respondents did not seek to submit that these offers of compromise and their rejection by the applicant justified the making of orders under Part 25 of the Federal Court Rules 2011 (Cth) or that the offers invoked Calderbank principles. The offers were relied on defensively.

Consideration - indemnity costs orders against respondents 21 The respondents did not seek to dispute the applicants' allegations about their conduct before and at trial. Nor could they, consistently with my findings in Labelmakers (No 2). The applicants' pleaded cases alleged that Mr Ernie Cooley, Mr Jason Cooley, Mr Scott Sweeney and Mr Paul Deveney ("the investor respondents") had, over varying periods during their employment by Labelmakers WA, set about the establishment of a new business which was to compete with their employer. They went to considerable lengths to ensure that their employer did not become aware of their activities. These activities involved the solicitation of clients of Labelmakers WA, the raising of capital, the ordering of machinery and the recruiting of Labelmakers WA's staff to work in the new business. 22 In their defences the investor respondents, for the most part, denied that they had engaged in these activities. In some instances conduct such as financial planning was admitted but it was claimed that such conduct had been undertaken in circumstances which did not involve any conflict with their fiduciary obligations to their employer. 23 The investor respondents steadfastly denied having sought to ensure the viability of their new business by obtaining commitments from customers of Labelmakers WA to transfer their business to the new entity. In order to establish the falsity of these denials it was necessary for the applicants to obtain documentary evidence from third parties. Loan applications, for example, were obtained from banks from whom the investor respondents had sought funding for their new venture. Those applications, which had been certified by some of the respondents as being true and correct, asserted that named customers of Labelmakers WA (including its largest customer) had committed themselves to supporting the new business. At the request of one of the banks one large customer had provided a letter of comfort confirming that it would place significant orders with the proposed competitor. 24 Having obtained such material, the applicants used it to challenge the veracity of the denials of the respondents. When Mr Ernie Cooley was confronted with the application form which he had signed and submitted to one of the banks and which asserted that a number of Labelmakers WA's customers had committed themselves to supporting the new business, he maintained his denial of solicitation by claiming that he had made false statements to the bank. Confronted with the documentary evidence, Mr Jason Cooley also sought to maintain his denial of being involved in the solicitation of clients. Like Messrs Ernie and Jason Cooley, Mr Sweeney denied having been involved in or being aware of solicitation of customers but was party to information being given to the banks which suggested otherwise. 25 The proprietors of some of the companies whose business had been solicited by the investor respondents were called by the defence in an effort to corroborate the investor respondents' denials of having engaged in such activity. It was necessary for the applicants to cross-examine these witnesses for some time in order to demonstrate that their affidavit evidence was untrue and unconvincing. 26 All of the investor respondents denied having spoken to other employees of Labelmakers WA with a view to recruiting them to work in the new business. Most of these denials were shown to be false. 27 Many other examples could be cited. They, and the examples just given, are dealt with in detail in Labelmakers (No 2) at [118] - [261]. They amply demonstrate that the vices attributed by the applicants to the investor respondents had made it necessary for the applicants to incur the expense of obtaining countervailing evidence from third parties and caused the trial to continue for considerably longer than it would otherwise have done. This was not a case in which key defence witnesses made honest mistakes in giving their evidence. A concerted attempt was made to avoid the truth becoming known. It is no overstatement to say that the investor respondents adopted a strategy of false denials which was maintained at trial and that they had attempted to bolster those denials by involving persons approached by them who, when tested, had to prevaricate and retreat from their attempts to provide corroborative evidence. 28 The offers of compromise fell well short of the relief which the second applicant has obtained in the proceeding. The offers were not unreasonably refused by the applicants. The making of the offers and their rejection carry little weight for present purposes. 29 The conduct of the first and the investor respondents at and before trial was such as to render them liable for an order for indemnity costs. Such an order should be made. 30 I do not consider that Ms Leech should be required to pay costs on either a party-party or indemnity basis. She was a junior employee of Labelmakers WA. She was susceptible to the influence of the investor respondents. Her transgressions were few in number. While she falsely denied at trial that she had e-mailed a copy of the Red Book from Labelmakers WA to her personal account, the evidence relating to her activities fell within a relatively short compass and did not cause any significant elongation of the trial. 31 There may be circumstances in which a respondent against whom only nominal damages are awarded may obtain an order for costs in his or her favour: cf Oshlack v Richmond River Council (1998) 193 CLR 72 at 98 (per McHugh J, with whom Brennan CJ agreed). No such order has been sought by Ms Leech. Had she done so it is likely that it would have been found that her conduct at trial disentitled her to any such order.

The parties' submissions - indemnity costs against the first applicant 32 In Labelmakers (No 3) I determined that no relief should be granted to the first applicant. Labelmakers WA purchased paper from it. The first applicant placed a mark-up on the price it charged for the paper. As a result of the investor respondents' misconduct Labelmakers WA lost a considerable amount of business and, as a result, significantly reduced its orders on the first applicant for paper. The result was that, after LL Force commenced operations, the first applicant suffered substantial profit losses. The first applicant sought damages for these losses on the basis that the investor respondents owed it the same duties as they did to their employer. 33 I rejected the claim on the ground that the investor respondents owed no fiduciary obligations to the first applicant: see Labelmakers (No 3) at [74]-[86]. 34 The respondents contended that the first applicant's claims were hopeless and were bound to fail. So much had been asserted in pre-trial correspondence, in the respondents' opening submissions and in closing submissions. Despite these warnings the first applicant had pressed on with its claims. In these circumstances, the respondents contended, they were entitled to an award of costs on an indemnity basis. They supported this claim by reference to the Full Court's decision in Gersten v Minister for Immigration and Multicultural Affairs [2001] FCA 260 at [19] and the decision of Finn J in Cirillo v Consolidated Press Property Limited (No 2) [2007] FCA 179 at [4]-[5]. 35 The first applicant opposed the making of any indemnity costs order. It contended that its claims against the respondents were neither hopeless nor bound to fail. It submitted that it had an arguable case that a fiduciary relationship existed between it and the investor respondents because the investor respondents, as senior officers of Labelmakers WA, were aware of the mark-up arrangements and the potential consequences of a reduction of orders by Labelmakers WA for the first applicant. These two entities were part of the same corporate group. While the establishment of a relevant obligation fell outside the established range of relationships which attracted such obligations, High Court authority, in Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 at 96 supported the proposition that the relevant categories were not closed.

Consideration - indemnity costs against first applicant 36 Gersten stands for the proposition that "[i]f an action is commenced when proper advice would indicate that the proceeding has no prospect of success, a discretion to award indemnity costs is ordinarily enlivened": see at [19]. In Cirillo Finn J adopted and acted on the observations of Gray J (with whom other members of the Court agreed) in Hamod v New South Wales (2002) 188 ALR 659 at 665 where his Honour said that: "Indemnity costs are not designed to punish a party for persisting with a case that turns out to fail. They are not awarded as a means of deterring litigants from putting forward arguments that might be attended by uncertainty. Rather, they serve the purpose of compensating a party fully for costs incurred, as a normal costs order could not be expected to do, when the court takes the view that it was unreasonable for the party against whom the order is made to have subjected the innocent party to the expenditure of costs." 37 The present case, in my view, falls within the principles expounded by Gray J. As my reasons in Labelmakers (No 3) demonstrate the first applicant had an arguable case against the respondents but the arguments were advanced in uncertain territory and did not, ultimately, prevail. 38 The usual order as to costs should be made in favour of the respondents and against the first applicant. Those costs will fall to be assessed in the context of the trial as a whole. Little time was spent on the claim of lost profits for paper sales. The experts were called on to express opinions on the issue but they did not disagree on the quantum of that loss were the claim held to be actionable. The respondents called no lay evidence on the point. Cross-examination relating to the issue was very short. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tracey.