Martinez as trustee for Martinez HWL Practice Trust as representative of the partners trading as HWL Ebsworth Lawyers v Griffiths as trustee for the Griffiths HWL Practice Trust
[2020] NSWCA 42
Court of Appeal (NSW)|2020-03-17|Before: Bell ACJ, Meagher JA, Acting Judge CJ, Robb J
[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]
[2]
Judgment
THE COURT: In its judgment delivered on 17 December 2019 (Martinez as trustee for Martinez HWL Practice Trust as representative of the partners trading as HWL Ebsworth Lawyers v Griffiths as trustee for the Griffiths HWL Practice Trust [2019] NSWCA 310) the Court directed that if the parties could not agree as to the orders to be made for the costs of the proceedings at first instance and on appeal, written submissions should be exchanged and that question decided on the papers.
The parties are agreed that the following orders should be made for the costs of the proceedings at first instance. They are in substance orders 2, 3 and 4 made by the primary judge (Robb J) by consent on 29 July 2019. Those orders took into account an offer of compromise made by the respondent, Mr Griffiths, in the underlying proceedings on 19 January 2017:
1. The defendant pay the plaintiff's costs of and associated with the proceedings at first instance on an ordinary basis up to 19 January 2017, as agreed or assessed.
2. Subject to order 3 below, the defendant pay the plaintiff's costs of and associated with the proceedings at first instance on an indemnity basis from 20 January 2017 to 6 June 2019, as agreed or assessed.
3. The plaintiff pay the defendant's costs thrown away by the vacation of the hearing in the District Court below before Acting Judge CJ Armitage on 26 September 2017, as agreed or assessed.
The remaining issue is as to the costs of the appeal proceedings. On 30 August 2019 Mr Griffiths made a further offer, expressed as made pursuant to Uniform Civil Procedure Rules 2005, r 20.26, to compromise the appeal proceedings on the following terms:
1. Appeal allowed in part.
2. In lieu of the judgment entered for the Respondent (Plaintiff) against the Appellant (Defendant) in the Court below for damages of $450,000, substitute judgment for the Respondent against the Appellant in the Court below for $90,000.
3. Orders 2 and 3 made by Robb J in the Court below on 29 July 2019 in respect of the costs of the proceedings in the Court below be confirmed.
4. Appeal otherwise dismissed.
That offer was open for acceptance for 28 days, was not accepted and was less favourable to Mr Griffiths than the orders made by this Court in the appeal.
On 25 September 2019 the appellant, Mr Martinez, made his own offer of compromise which also provided for an award of damages of $90,000 but differed in providing that the appeal be allowed and that the respondent's costs, including at first instance, be capped at $100,000. Whilst that offer is not pressed by Mr Martinez for the purposes of "seeking costs in the appeal proceedings", it remains relevant as an indication that the appellant considered the sum of $90,000 to be reasonable compensation for breach of the firm's obligation to terminate the respondent's employment by giving him three months' notice or payment in lieu of that notice.
Although that offer was not expressed as made under Uniform Civil Procedure Rules 2005 (NSW), r 51.47, Mr Martinez accepts that it was effective to engage r 51.48, which applies the provisions of Pt 42, Div 3, as modified by r 51.48(1) and subject to r 51.49, to the appeal proceedings. Those modifications have the consequence that Mr Griffiths' offer falls to be dealt with under r 42.14 as an offer made by him, as plaintiff in the court below, which was not accepted by Mr Martinez, as defendant, where Mr Griffiths obtained a judgment on appeal no less favourable to him than his offer.
Under r 42.14 so applied, the question for this Court is whether to "order otherwise" to displace a presumption that Mr Martinez as appellant pay Mr Griffiths' costs of the appeal on the ordinary basis up to the date of the offer, 30 August 2019, and a further presumption that he pay those costs on an indemnity basis from 31 August 2019.
Mr Martinez submits that the Court should order "otherwise" and make the following orders:
4. That the Respondent pay the Appellant's costs of the appeal up to 30 August 2019 on an ordinary basis, as agreed or assessed.
5. That the Appellant pay the Respondent's costs of the appeal from 31 August 2019 on an ordinary basis, as agreed or assessed.
The considerations which inform the exercise of the discretion to "order otherwise" under r 42.14 in its 'modified' application to offers made in appeal proceedings must include whether the "plaintiff" who has obtained the more "favourable" judgment, thus engaging the application of r 42.14, has done so as appellant or respondent in the appeal. That is particularly so in relation to any consideration as to the exercise of the discretion to "order otherwise" in relation to the costs of the appeal incurred before the making of the relevant offer. And that is because whereas in the underlying proceedings the "plaintiff" will have been the moving party, in the appeal proceedings the plaintiff may not be the moving party, and as here, the "favourable" judgment, measured by reference to the offer of compromise, may also represent a successful outcome to the "defendant" as appellant.
The principles applying to the exercise of the discretion to "order otherwise" (in earlier rules of the Supreme Court which did not provide that costs incurred after the non-acceptance of an offer which has been exceeded were to be assessed on an indemnity basis) focus on the position as between the offeror and the non-accepting party who has not achieved a more favourable judgment. Those principles were summarised by Mason P (Sheller JA agreeing) in Morgan v Johnson (1998) 44 NSWLR 578 at 581-582 as follows:
(1) The purpose of the rule is to encourage the proper compromise of litigation, in the private interests of individual litigants and the public interest of the prompt and economical disposal of litigation: Maitland Hospital [(1992) 27 NSWLR 721] (at 725-726); Hillier [(1995) 36 NSWLR 414] (at 421, 431).
(2) The aim is to oblige the offeree to give serious thought to the risk involved in non-acceptance: Maitland Hospital (at 724).
(3) The prima facie consequence of non-acceptance will be that the rule will be enforced against the non-accepting party: NSW Insurance Ministerial Corporation v Reeve [(1993) 42 NSWLR 100] (at 102); Hillier (at 422). This is because, from the time of non-acceptance "notionally the real cause and occasion of the litigation is the attitude adopted by [the party] which has rejected the compromise": Maitland Hospital (at 724); see also Hillier (at 420).
(4) Lying behind the rule is the common knowledge that "litigation is inescapably chancy": Maitland Hospital (at 725). For this reason, the ordinary provision is expected to apply in the ordinary case: ibid NSW Insurance Ministerial Corporation v Reeve (at 102-103). The mere fact that it was reasonable for the litigant to take the view that he or she did in rejecting the offer is not enough to displace the rule: NSW Insurance Ministerial Corporation v Reeve (at 102).
…
(5) The discretion to displace the rule is a judicial one, requiring the private and public purposes of the rule to be borne in mind: Maitland Hospital (at 725-726). Reasons must be given for "otherwise ordering": Hillier (at 419); Quach [(Court of Appeal, 15 June 1995, unreported)].
As this Court observed in Croghan v Blacktown City Council [2019] NSWCA 248 at [12]-[13] (Meagher JA, McCallum JA and Simpson AJA agreeing):
[12] In ordinary litigation, where the presumption that costs follow the event applies, a significant consideration in determining that an order "otherwise" is justified is whether in the circumstances the offeree acted reasonably in rejecting the offer, although it is recognised that it may not be sufficient to justify such an order that the offeree reasonably believed at the time that it was justified in rejecting the offer: see New South Wales Insurance Ministerial Corporation v Reeve (1993) 42 NSWLR 100 at 102; The Uniting Church in Australia Property Trust (NSW) v Takacs (No 2) [2008] NSWCA 172 at [15], [18], [31]; Leach v Nominal Defendant (QBE Insurance (Australia) Limited) (No 2) [2014] NSWCA 391 at [48]; Aukuso v Tahan (No 2) [2018] NSWCA 302 at [60] - [62].
…
[13] In Fairall v Hobbs (No 2) [2017] NSWCA 133, where it was accepted that the presumption in r 42.15 might be displaced "by demonstrating that the rejection of the offer was reasonable", the Court described the matters relevant to such an assessment as including:
…where the full parameters of the dispute are still uncertain at the time of the offer: Equity 8 Pty Limited v Shaw Stockbroking Limited [2007] NSWSC 503 at [42]; or where the offeror's case changes after the offer: South Eastern Sydney Area Health Service v King [2006] NSWCA 2 at [85]; or where all relevant evidence has not been served before the offer: Vale v Eggins (No.2) [2007] NSWCA 12 at [22].
There were three issues in the present proceedings, at first instance and on appeal. They were (1) whether Mr Martinez was justified in terminating Mr Griffiths' employment summarily; and if not, (2) the damages to which Mr Griffiths was entitled on the assumption that but for that breach his employment would nevertheless have been terminated by notice or payment in lieu of notice; and (3) whether Mr Griffiths was entitled to additional damages for loss of the commercial opportunity to seek other employment whilst serving out any period of notice, referred to as "the benefit of incumbency". The primary judge decided each of these issues in favour of Mr Griffiths, awarding him $450,000 in damages (rounded down): $145,000 for the unjustifiable termination without notice or payment in lieu of notice and $305,375 for loss of the benefit of incumbency.
By his appeal Mr Martinez took issue with each of these conclusions. In that context Mr Griffiths' offer of compromise, which included that the appeal be "allowed in part", implied that Mr Martinez as appellant would fail in his challenge on the first issue and have some success in relation to his challenges on the second and third issues as to damages. In that latter respect the most likely scenario consistent with an offer of $90,000 in damages was that there would be some adjustment to the damages award in relation to the second issue and success for Mr Martinez in relation to the third. That is what occurred, this Court reducing the damages in relation to the second issue from $145,000 to $127,000 and overturning the award of damages with respect to the third.
It is convenient first to consider the exercise of the discretion to "order otherwise" in relation to the second of the orders provided for by r 42.14(2), namely that dealing with the costs of the appeal from the date Mr Griffiths' offer of compromise was made.
Mr Martinez relies on three matters as demonstrating that his rejection of that offer was reasonable. First, it is said that the appeal was allowed "in part", demonstrating that Mr Martinez was "required to appeal in order to vindicate his position". However that is not a relevant consideration in circumstances where Mr Griffiths' offer of compromise provided that the appeal be allowed in part, that the damages claim for loss of the "benefit of incumbency" be rejected and that the damages for breach of the obligation to give notice or make payment in lieu of notice be reduced to $90,000. The relevant question remains whether Mr Martinez's rejection of that offer was reasonable in circumstances where he accepted by his own offer made a month later that a reasonably likely outcome of the appeal was that proposed by Mr Griffiths' offer - from Mr Martinez's perspective, failure on the first issue, success on the third and partial success on the second; with $90,000 being a reasonable compromise of his liability in relation to the second.
Secondly, Mr Martinez says that the rejection of Mr Griffiths' offer only occurred after "serious thought" and an assessment of the merits of the arguments in relation to the issues in the appeal. Specifically, it is said that he was reasonably justified in taking the view that the damages to be awarded would be "significantly reduced" on appeal. That view was certainly available. However this submission also does not address the relevant question being whether he acted reasonably in rejecting an offer which substantially reduced those damages to $90,000.
Finally, Mr Martinez maintains that it was reasonable to reject Mr Griffiths' offer because in relation to the costs orders proposed for the proceedings before Robb J it excluded the confirmation of order 4 made by his Honour on 29 July 2019. That order was that Mr Griffiths pay the costs thrown away by the vacation of the two-day hearing in the District Court before Acting Judge CJ Armitage on 26 September 2017, and its value was asserted to have been "significant". In our view that is not the effect of Mr Griffiths' offer, the terms of which are set above (see [3]). The proposed confirmation of "orders 2 and 3" made on 29 July 2019 necessarily carried with it the terms of order 4 because order 3 was expressed to be "subject to order 4 below".
In the result we are not satisfied that Mr Martinez's rejection of Mr Griffiths' offer was reasonable, so as to justify a departure from the order to which he is entitled under the modified application of r 42.14(2)(b). On the contrary, Mr Martinez's subsequent offer recognised the reasonableness of that offer.
Turning then to whether to "order otherwise" with respect to the costs of the appeal up to 30 August 2019, Mr Martinez submits that Mr Griffiths should pay his costs incurred during this period on the ordinary basis, notwithstanding that he ultimately failed on the first (liability) issue and had only partial success on the second. It is said that the raising and maintaining of the first issue on appeal involved a consideration of factual circumstances also relevant to the second and third damages issues, on which Mr Martinez had some success. In response Mr Griffiths contends that the prima facie position under r 42.14(2)(a) should apply, with the result that Mr Martinez should pay his costs of the appeal assessed on the ordinary basis up to 30 August 2019.
That submission does not recognise that Mr Martinez as appellant had partial success in his appeal, reducing the judgment against him from $450,000 to $127,000. Ordinarily in litigation, whether at first instance or on appeal, costs follow the event in the absence of circumstances justifying a different or special order. Those circumstances include that the successful party has failed on claims or issues which are severable and have occupied not insignificant time and expense. This court outlined the position in Elite Protective Personnel Pty Ltd v Salmon (No 2) [2007] NSWCA 373 at [7] (Beazley JA, McColl JA and Basten JA):
[7] As the appellants submit, the commencing position is that costs follow the event so that a successful party is entitled to costs. In relation to trials it has been said that it may be appropriate to deprive a successful party of costs or a portion of the costs if the matters upon which that party was unsuccessful took up a significant part of the trial, either by way of evidence or argument: Sabah Yazgi v Permanent Custodians Limited (No 2) [2007] NSWCA 306 (at [24]). A similar approach is adopted in the Court of Appeal. If the appellant loses on a separate issue argued on the appeal which has increased the time taken in hearing the appeal, then a special order for costs may be appropriate which deprives the appellant of the costs of that issue: Sydney City Council v Geftlick & Ors (No 2) [2006] NSWCA 374 (at [27]).
Here, Mr Martinez succeeded partially on the second and completely on the third of the issues in the appeal. That success should be taken into account in relation to his costs of bringing the appeal up to the time of his unreasonable rejection of Mr Griffiths' offer.
Mr Martinez submits that the three issues should not be treated as separate because there was a factual overlap between them, being his critical email exchanges with Mr Griffiths and the allegations of misconduct made in those exchanges. In our view, that does not reflect the substance of the three issues and the different questions they raised. The first concerned an unpleaded allegation of a lack of candour as to the work done for Mr Griffiths' brother, whereas the disposition of the second and third turned on an evaluation of whether, and if so when, Mr Martinez would have elected to terminate Mr Griffiths' employment by notice, or payment in lieu of that notice.
In these circumstances, the costs order up to 30 August 2019 should take account of the partial successes of the parties. As each had some measure of success on one or more of those issues, each should bear its own costs of the appeal up to 30 August 2019, it being likely that the costs to which each would otherwise have been entitled balance each other out.
Accordingly, the Court makes the following orders:
1. The appellant pay the respondent's costs of and associated with the proceedings at first instance on an ordinary basis up to 19 January 2017, as agreed or assessed.
2. Subject to order 3 below, the appellant pay the respondent's costs of and associated with the proceedings at first instance on an indemnity basis from 20 January 2017 to 17 December 2019, as agreed or assessed.
3. The respondent pay the appellant's costs thrown away by the vacation of the hearing in the District Court below before Acting Judge CJ Armitage on 26 September 2017, as agreed or assessed.
4. Each party to bear their own costs of and associated with the appeal proceedings up to 30 August 2019.
5. The appellant pay the respondent's costs of and associated with the appeal proceedings on an indemnity basis from 31 August 2019, as agreed or assessed.
[3]
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Decision last updated: 17 March 2020
Parties
Applicant/Plaintiff:
Martinez as trustee for Martinez HWL Practice Trust as representative of the partners trading as HWL Ebsworth Lawyers
Respondent/Defendant:
Griffiths as trustee for the Griffiths HWL Practice Trust