LGS v Barbagallo

Judgment 1HIS HONOUR: I gave judgment in these proceedings on 18 September 2012: [2012] NSWSC 1099. I ordered that there be judgment for the defendants on the plaintiffs' claim with costs, and gave leave for any application for a further or special costs order to be made by notice of motion filed within 14 days. 2The defendant (Dr Barbagallo) has moved for special costs orders: (1) that his costs be paid on the indemnity basis, either in whole or from specific dates; (2) fixing those costs in a gross sum; (3) that the moneys held in court as security for his costs be paid out to him forthwith; and (4) that non-parties to the litigation, Ms Sullivan and a company controlled by her, LGS Enterprises Pty Limited, pay his costs. The application for indemnity costs 3The application for indemnity costs is made on alternative bases: (1) that the proceedings were an abuse of process; (2) a document said to be an offer of compromise, alternatively a "Calderbank" offer, served on 19 September 2006; or (3) a document said to be a Calderbank offer, served on 6 January 2009. Abuse of process 4Mr Jackman of Senior Counsel, who appeared with Mr Tyson of counsel for Dr Barbagallo (and who had appeared for Dr Barbagallo during the hearing), submitted that the proceedings were an abuse of process for the following reasons: (1) the circumstances in which Dr Barbagallo left the employ of one of the plaintiffs, In Vivo Vic (as I called it in my earlier reasons), caused Ms Sullivan, the effective owner and controller of In Vivo Vic and the other plaintiff, to hold a grudge against him and in turn inspired in her the desire to cause him harm; (2) these proceedings were commenced in furtherance of that desire; (3) the allegations made in the proceedings included grave allegations akin to fraud (this, in the context of a "Barnes v Addy" claim for accessory liability); (4) the proceedings were always hopeless, and doomed to fail - this was said to lend strength to the submission that the proceedings were commenced only with the desire to cause harm to Dr Barbagallo; and (5) Ms Sullivan and another witness, her partner Mr Vincent, gave evidence, on a matter integral to their case, which was knowingly false, and concocted for the purpose of furthering the plaintiffs' case and thus of causing harm to Dr Barbagallo. 5Mr Pritchard of Senior Counsel, who appeared for the plaintiffs (but who did not appear for them at the hearing) submitted that: (1) the evidence fell far short of showing that Ms Sullivan held a grudge against Dr Barbagallo, or that she wished to cause him harm; (2) the proceedings could not be said to have been hopeless (or that they should or must have been appreciated to have been hopeless), bearing in mind that the plaintiffs' solicitor had given the appropriate certificate and that the plaintiffs had been represented by capable and experienced senior and junior counsel; (3) in the way in which these proceedings came to an end (at the conclusion of the plaintiffs' case, I entertained an application for judgment on the basis that the evidence, considered on the "jury basis", did not make good the pleaded cause of action; and I came to the conclusion that the submission was good), the court would not be justified, not having heard all the evidence that would otherwise have been available, in reflecting adversely on the credibility of Ms Sullivan and Mr Vincent; and (4) indeed, the allegations of abuse of process had not been properly or adequately put to Ms Sullivan. 6Mr Pritchard pointed to the fact that the plaintiffs had provided security for costs of almost $500,000.00 (the precise amount was, I think, $482,880.00). Further, he said that the court could infer that the plaintiffs had spent, in respect of costs, amounts probably equivalent to those shown to have been spent by Dr Barbagallo (which exceeded $930,000.00). He submitted that the court could not infer that the plaintiffs would have risked those sums purely to pursue some grudge, by prosecuting a claim that they knew or must have appreciated was hopeless. Decision 7I accept Mr Pritchard's submission that the evidence does not show that Ms Sullivan caused the plaintiffs to commence the proceedings, regardless of any merit, for the purpose of causing harm to Dr Barbagallo. 8I am prepared to accept, as Mr Jackman submitted, that Ms Sullivan was displeased that Dr Barbagallo had left the employ of In Vivo Vic. The reasons that he gave were rational, and (if it matters) were justified on the state of affairs existing at the time he resigned. But that did not appease or diminish Ms Sullivan's displeasure. 9Mr Jackman relied on the notes of what might be called an "exit interview" between Ms Sullivan, Mr Vincent and Dr Barbagallo. The notes show, and I find, that Ms Sullivan insisted that Dr Barbagallo would "have to give a proper notice period and not [leave] at such short notice", and that she was aggrieved because the short notice would be inconvenient having regard to "current commitments" and "fall out" in relation to clients if Dr Barbagallo left precipitately. 10Equally, the notes show, and I find, that Mr Vincent expressed a suspicion (emphatically denied by Dr Barbagallo) that Dr Barbagallo might be either joining a competitive business or commencing his own business in competition with the In Vivo group. 11The notes show further, and I find, that Ms Sullivan did say that if Dr Barbagallo joined a competitor "that will change everything including our relationship and you will get lots of flack". 12After Mr Vincent suggested that Dr Barbagallo should "make a proper and planned exit strategy from the business", Ms Sullivan is recorded as saying: "we should do so so that you can be comfortable with the process as there will be other ways so that we don't make your life a hell". 13Further discussions related to the brevity of the notice period, proposals that Dr Barbagallo should continue to work, not full time, to ensure continuity with clients, and generally "a proper transition". 14It is clear from the note that Ms Sullivan was extremely upset at Dr Barbagallo's announcement of his intention to resign on short notice. It is clear that she thought that she (or more accurately In Vivo Vic) was entitled to more, including a longer period of notice, and Dr Barbagallo's working to ensure an effective and smooth "transition". 15Equally, it is clear that Ms Sullivan raised, at least as a prospect, that Dr Barbagallo would "get lots of flack" if he moved immediately to take up employment with a competitor of the plaintiffs. I infer that the comment about making his life "a hell" was made in the same context. 16But none of this explains why the plaintiffs waited for six years - almost until the relevant limitation period had expired - before commencing proceedings. I should note that Mr Jackman submitted that this was a factor lending support to the allegation of abuse of process. I am not quite sure why this is so, unless perhaps on the basis that the court can take judicial notice of the principle that "revenge is a dish best served cold". 17It is not as though Ms Sullivan or Mr Vincent were unaware, for some six years, of matters that would cause them to suspect that Dr Barbagallo had taken and misused confidential information. On the contrary, and even accepting the evidence at its most favourable from their perspective (and I hasten to say that this is merely an assumption, not a finding of fact), they became aware, shortly after Dr Barbagallo left, of what they characterised as a questionable transaction that Dr Barbagallo had caused In Vivo Vic to undertake with a particular client relatively shortly before he left. On the same basis, the evidence shows that they had become aware that In Vivo Vic had lost this client, and that Dr Barbagallo had gained it, relatively shortly after he left the employment of In Vivo Vic. 18If Ms Sullivan's motive in commencing proceedings were revenge, and if this motive were so strong as to cause her to institute what were characterised as hopeless proceedings simply for the purpose of punishing Dr Barbagallo, one would have expected the administration of the punishment to commence much earlier than it did. 19I do not find that the institution and prosecution of the proceedings were motivated by actual malice, or by some improper purpose such as the sole desire to cause harm to Dr Barbagallo. 20However, that is not the end of the matter. Mr Jackman relied on the principle enunciated by Woodward J in Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at, in particular, 401. In that case, Woodward J said (at 401) that indemnity costs could be awarded where the action was commenced or continued in circumstances where the applicant, properly advised, should have known that there was no chance of success. That would lead, his Honour said, to the presumption of ulterior purpose, or to the inference that the action had been commenced "because of some wilful disregard of the known facts or the clearly established law". 21In this case, I found that the plaintiffs' evidence, taken at its highest - as I have said, on the "jury basis" - fell short of making good the pleaded case. For present purposes, there were two basic reasons for coming to that view: (1) I concluded that the plaintiffs had not proved that the allegedly confidential information said to have been taken and misused by Dr Barbagallo was indeed confidential in the sense that the law requires if it is to be afforded protection; and (2) in any event, the plaintiffs had failed to prove that Dr Barbagallo had taken, let alone that he had misused, any such information. 22Mr Pritchard submitted that this was an insufficient foundation for the imposition of indemnity costs, in circumstances where the plaintiffs had had legal advice throughout, where their lawyers had given the appropriate certificates, and where senior and junior counsel, no doubt fully cognisant of their obligations, had presented the plaintiffs' case at the hearing. 23However, I am not concerned with an inquiry into what the lawyers knew or advised. Nor am I concerned to inquire what they made of their instructions. As Woodward J said in Fountain Selected Meats at 401, the question is whether the plaintiffs "properly advised, should have known that [they] had no chance of success". The conclusion to be drawn from my reasons is that proper advice on the whole of the evidence amassed by the plaintiffs (which, one must assume, reflected the instructions given by them throughout), requires that question to be answered "yes". It leads to the conclusion that the action was started and prosecuted with "wilful disregard of the known facts or the clearly established law". 24In this context, the requirement for a plaintiff, seeking protection of its confidential information, to identify with specificity the information said to be confidential, and to prove adequately why it was confidential, is hardly novel or surprising. Nor was it in April 2006, when these proceedings were commenced. 25It is significant that, in the course of her cross-examination, Ms Sullivan acknowledged that she perhaps had a different concept of confidentiality to that understood by the law, as worthy of protection. In her evidence at the hearing, the following passage occurred (T83.31 -.36): Q. So it is not the case that you regarded the whole document as confidential, correct? Is that correct? A. We actually do regard the whole document as confidential but I accept that there are sections that are in the public domain and therefore in your terminology would not be confidential. But as far as an agency producing a proposal for a client, it is absolutely confidential. 26That passage conveys strongly the impression that Ms Sullivan was seeking to protect information that she regarded as commercially confidential, even though she knew that at least some of it might not be confidential in the eyes of the law - "in your terminology". 27Also of note in this context is that the plaintiffs' ultimate response to requests made repeatedly of them to identify the information claimed to be confidential was to produce a large bundle of documents. In her affidavits, Ms Sullivan accepted that many of the documents thus identified as being confidential were in fact not confidential. In her cross-examination, she abandoned many more claims to confidentiality. I dealt with this at [140] to [146] of my reasons of 18 September 2003. 28Mr Pritchard protested that this was an inadequate basis to order indemnity costs, at least without some further complicating factor. If it were not so, he submitted, any decision to grant summary judgment would carry with it the proposition that the party entitled to judgment was entitled also to costs on the indemnity basis. It is unnecessary to say more than that is not the situation with which I am concerned. I do not think that it is particularly helpful to analyse the issue arising on the facts of this case by relevant to extrinsic, hypothetical and distinguishable facts. 29Mr Pritchard submitted further, that the plaintiffs had never been put on notice that Dr Barbagallo considered their case to be hopeless on this basis: at least, Mr Pritchard submitted, until Mr Jackman came into the matter and (with Mr Tyson) furnished Dr Barbagallo's opening written submissions. 30I do not accept that submission. The failure to particularise "Confidential Information" was the subject of complaint in a letter of 24 September 2007. Further, and whilst the proceedings were still in the District Court, there were repeated applications for particulars, for strike-out and the like, in the course of which the adequacy of the pleading and particularisation of the plaintiffs' confidential information case was raised. On one occasion, Phegan DCJ ordered that the relevant paragraphs of the then statement of claim be struck out, although with liberty to replead. 31I am satisfied that the adequacy of the pleading and particularisation of the confidential information case was a live matter from early in the history of the proceedings, and that it continued to be live until the matter was heard and determined. Thus, I do not accept that, if it were otherwise appropriate to order costs on the indemnity basis, that consequence should be deflected simply because Dr Barbagallo had not raised his complaints on this issue until the last moment. 32In this case, the articulation of the plaintiffs' case, and the sufficiency (or otherwise) of their demonstration of what the information was and why it was confidential, were always live issues. Unless and until those issues were addressed adequately, there could be no assessment of the consequential question, of whether Dr Barbagallo had taken or misused confidential information of the plaintiffs. 33In my view, looking at the matter as a whole, and taking into account (as I am bound to do) my reasons for finding for Dr Barbagallo on the plaintiff's claim, I conclude that the Fountain Selected Meats test has been satisfied. I find that the plaintiffs, properly advised, should have known that their case was hopeless. It is immaterial whether or not they were properly advised. The test postulated by Woodward J is objective. It does not bear on the content or quality of any advice actually given. In any event, there was no such advice proved. 34Thus, whilst I have not found that the proceedings were commenced for some actual improper reason, I do find that their commencement and continuation demonstrates wilful disregard of the facts and the relevant principles of law. Of course, Woodward J said that this may justify the court's drawing an inference of ulterior purpose. But it is not the inference (if drawn) that supports the award of costs on the indemnity basis. It is the underlying issue: put shortly, the decision to commence and prosecute an obviously hopeless case. 35To my mind, that amounts to "relevant delinquency" (to adopt the words of Gaudron and Gummow JJ in Oshlack v Richmond River Council (1998) 193 CLR 72 at [44]) sufficient to justify an order for indemnity costs. 36For those reasons, I conclude that Dr Barbagallo (and the second defendant, his company) should have their costs on the indemnity basis, from the commencement of the proceedings. The offer of compromise and Calderbank offers 37In those circumstances, it is unnecessary to express a concluded view as to the offer of compromise, considered either as an offer made pursuant to UCPR r 20.26 (as Dr Barbagallo said it was) or as a Calderbank offer; nor as to the (later) Calderbank offer. 38There was a debate as to whether the offer of compromise did comply with r 20.26. It was in the following terms: 1. Judgment for the plaintiffs in the sum of $10,000.00; 2. The first defendants cross-claim against the plaintiffs be dismissed; and 3. The first and second defendants to pay the plaintiffs' costs as assessed. 39Mr Pritchard submitted, on the authority of Old v McInnis [2011] NSWCA 410 at [18], that the offer did not comply with the rule. Mr Jackman submitted to the contrary, relying on, among other decisions, Vieira v O'Shea (No.2) [2012] NSWCA 121 at [7]. It is unnecessary to enter on that debate. 40I will however say something about the offer of compromise, considered as a Calderbank offer, and about the second Calderbank offer. 41Mr Pritchard accepted that the offer of compromise could be considered as a Calderbank offer, because the letter under cover of which it was sent was stated to be "without prejudice save as to costs." 42For the same reasons, the second letter of offer, of 6 January 2009, was treated as a Calderbank offer because it too was sent "without prejudice save as to costs". 43Mr Pritchard submitted that the first offer, considered as a Calderbank offer, was not sufficient to enliven the discretion because it did not offer a genuine compromise and because, in any event, the reasons why it was made had not been explained. I think that there is force in the latter part of this submission. The letter simply referred to the proceedings, enclosed the offer of compromise and requested acknowledgment of receipt. The letter making complaints about the adequacy of the particularisation of the confidential information case was not written until a year later, on 24 September 2007. 44There is nothing in the evidence to show that, as at 19 September 2006, Dr Barbagallo had made clear to the plaintiffs (as later he did) his reasons for suggesting that their case was bound to fail. To put it another way, it does not appear that, as at 19 September 2006, the plaintiffs had been made aware of what Dr Barbagallo perceived to be (and were ultimately held to be) the significant - indeed fatal - problems with their case. 45Thus, if the offer of 19 September 2006 fell to be considered only as a Calderbank offer, I would not conclude that it gave a proper basis for the award of costs on the indemnity basis. 46I turn to the Calderbank offer of 6 January 2009. That was expressed to be open until 16 January 2009. The "compromise" proposed was of that of the sum of $272,880 then held in court as security for Dr Barbagallo's costs, some 80% should be paid out to him (with interest) and the balance to the plaintiffs. 47Mr Pritchard submitted, again, that there was no real element of compromise. He submitted, further, that the time allowed for consideration of the offer was inadequate. 48Again, I think, there is force in the second submission. The letter was written during the law vacation. It allowed only 7 business days for its acceptance. In those circumstances, were it necessary to do so, I would conclude that the time held open for acceptance of the offer was inadequate.