Narellan Franchise Pty Ltd v RBME Pty Ltd

Supreme Court of NSW|2023-05-19|Before: Richmond J

Judgment

This judgment concerns a costs dispute arising out of restraint of trade proceedings. It has two aspects. First, the defendants seek an order for payment of a lump sum on account of their costs of successfully defending the plaintiffs' claims for injunctions preventing the defendants from competing with the plaintiffs (the plaintiffs' remaining claims in the proceedings remain to be determined). Second, there is a dispute as to the costs of an application by the defendants for leave to vary undertakings they had previously given to the Court.
The proceedings were commenced urgently in June last year. Two judgments have been delivered so far. The first dealt with the plaintiffs' application for interlocutory injunctions pending trial. Richmond J heard that application in June. His Honour delivered judgment in July, granting the interlocutory injunctions sought: Narellan Franchise Pty Ltd v RBME Pty Ltd [2022] NSWSC 988.
The second judgment followed an expedited separate hearing of the plaintiffs' urgent claims for final relief in the proceedings. Initially, this was to include the plaintiffs' claims for relief concerning the alleged misuse of their confidential information. Eventually, only the plaintiffs' claims for final restraint-of-trade injunctions were pressed. The expedited hearing took place in October and November last year. I delivered my judgment in late November: Narellan Franchise Pty Ltd v RBME Pty Ltd (No 2) [2022] NSWSC 1590. I concluded that neither plaintiff was entitled to an injunction enforcing the relevant restraints (see [248]-[249]). This judgment assumes familiarity with that judgment. I will refer to it as "J2".

Application for payment of fixed sum on account of costs

The defendants seek an order that the plaintiffs pay $404,000 (incl. GST) on account of costs, payable within 14 days. The defendants rely on three affidavits of their solicitor, Mr Matthew Watson, dated 26 October (including annexures), 22 December and 9 March (in reply). They also tender Exhibit MDW-2. The plaintiffs rely on an affidavit of their solicitor, Mr Timothy Atkin, dated 12 December.
The defendants accept that their application is limited to the liabilities the plaintiffs have under the orders made on 12 December, namely, to pay the defendants' costs of the interlocutory hearing before Richmond J and of the expedited hearing before me. The defendants rely on estimates of Mr Watson in quantifying that amount. Mr Watson estimated that 95% of the costs set out in invoices before him fell within that scope.
The plaintiffs contest the making of such an order at all. Alternatively, they submit that the sum was too large. In their submission, an amount of $180,000-$200,000 would be more appropriate.
I have made an order for the payment of a fixed sum on account of costs in several cases. I first did so in Omutta Pty Ltd v Wilson (No 2) [2019] NSWSC 401. I most recently did so in Ashwood v Ashwood [2023] NSWSC 208. As I explained in Omutta at [12]-[13], I see the making of such an order as an alternative to ordering that costs be assessable forthwith. In this application, no issue was raised about the power to make an order for the payment of a fixed sum on account. The question is therefore whether an order for immediate assessment and payment of the subject costs would be appropriate.
There is division between the parties regarding whether the costs order made in December is interlocutory in nature. The plaintiffs submit that it is. The defendants contest this, submitting that the hearing before me was an "event" for the purposes of r 42.1 of the Uniform Civil Procedure Rules 2005.
According to the defendants, I do not need to resolve that dispute. On their submission, it is sufficient to apply the principles concerning orders for payment of costs forthwith. Those principles, it is submitted, are contemplated by r 42.7(2) (see below) and point to an order of a payment on account of costs.
Rule 42.7 of the UCPR provides: Interlocutory applications and reserved costs (1) Unless the court orders otherwise, the costs of any application or other step in any proceedings, including - (a) costs that are reserved, and (b) costs in respect of any such application or step in respect of which no order as to costs is made, are to be paid and otherwise dealt with in the same way as the general costs of the proceedings. (2) Unless the court orders otherwise, costs referred to in subrule (1) do not become payable until the conclusion of the proceedings.
I briefly considered the application of that rule in Ashwood at [85]: In one sense, the costs orders on the cross-claim, at least, are final. Nevertheless, the parties proceeded on the basis that UCPR r 42.7 applies. I think that assumption is correct, given that the defendants remain party to continuing proceedings. An order in favour of a party who is not a party to continuing proceedings (such as a cross-defendant who is not a party to the principal claim) may give rise to different considerations. Indeed, the rule may not apply to such a party at all.
As in Ashwood, each of the defendants remain party to continuing proceedings. Moreover, I have ordered that the defendants have liberty to apply to vary the costs order made, after the remaining issues in the proceedings have been determined (see above at [16]). In those circumstances, I think that r 42.7 applies. But, as the defendants have submitted, it is not necessary for me to decide that question. On either view, the parties invited me to apply the principles relevant to ordering interlocutory costs to be payable forthwith.
Both parties relied on the judgment of Barrett J in Fiduciary Ltd v Morningstar Research Pty Ltd (2002) 55 NSWLR 1. His Honour identified (at [11]-[13]) categories of cases where interlocutory costs had been ordered to be payable forthwith. One of those categories was where the costs order relates to "the determination of a separately identifiable matter or may be viewed as the completion of a discrete aspect" of the proceedings (at [11]).
Counsel for the defendants submitted that the hearing before me determined discrete issues, which do not overlap with remaining issues. Counsel for the plaintiffs submitted that the issues determined were not neatly severable. In support of that submission, they referred to: (i) the issue of misuse of confidential information forming part of the basis for the interlocutory application before Richmond J; (ii) the fact that additional issues were, initially, meant to be determined in the hearing before me (see above at [3]); (iii) the fact that some of the hearing time before me was occupied with determining a factual matter (namely, which defendants were responsible for downloading electronic material of the plaintiffs) likely to be relevant to later issues, but not those determined.
In my view, the costs order related to the determination of a sufficiently discrete part of the proceedings. Specifically, it concerned the final determination of the plaintiffs' claims for final injunctions to enforce competition restraints.
The matters identified by counsel for the plaintiffs do not deny that characterisation. The costs order (extracted above at [16]) fastens upon the hearing of the preliminary question as varied on 1 November, thus avoiding issues that were no longer to be determined. The costs order also encompasses costs incidental to the hearing of that varied question. The factual matter identified by counsel for the plaintiffs as not directly relevant, would either be picked up by the costs order by virtue of a sufficient connection with the preliminary question (to render it "incidental" to it), or not picked up at all.
There is, however, force in the plaintiffs' submission that the issue of misuse of confidential information is not neatly severable. Although, as counsel for the plaintiffs noted, that issue was resolved by the giving of undertakings, the associated claim for final injunctions to restraint misuse of confidential information has not yet been determined. It is presently unclear what the costs consequences will be of the final determination of that claim.
I do not see this as a reason for refusing an order for immediate assessment of the costs that have been ordered. In theory, it could be relevant to the assessment of the quantum to be paid. But having regard to the conclusion I have reached it is not necessary to go into the matter any further in this case.
Counsel for the defendants advanced two additional reasons why an order for payment on account should be made.
The first was that if the order is not made, the defendants will be kept out of their entitlement to costs for some time. Counsel referred to an appeal on foot that they expected would be heard in the second half of this year. Counsel also expected that the defendants' cross-claim and plaintiffs' damages claims would not be heard and determined until mid-2024.
Although not referred to by counsel for the defendants, that submission clearly draws upon a further category in Fiduciary v Morningstar at [13]: where it appears that final disposition of the proceedings will be a "fairly long time" away because there is "much to come" (quoting Giles J in Doran Constructions Pty Ltd v University of Newcastle, 16 December 1994, unreported). Counsel referred to a decision of Simpson J (as her Honour then was) where her Honour placed emphasis on this consideration (among others) in making an order that costs be payable forthwith: Hamod v New South Wales [2007] NSWSC 707 at [12]. Counsel also relied on a comment of Bathurst CJ in Showtime Touring Group Pty Ltd v Mosley Touring Inc (2013) 296 ALR 597 at [31] that "lengthy delay in an entitlement to enforce an unchallenged costs order does nothing to facilitate the just, quick and cheap resolution of proceedings".
Counsel for the plaintiffs conceded that this argument of the defendants was plausible. Nonetheless, they submitted that the defendants are in the same position as any other party obtaining an interlocutory costs order, such that the ordinary rule should apply. Moreover, they submitted that the Court's case management processes would prevent the case from dragging out.
I agree with counsel for the defendants that these proceedings should be characterised in the manner submitted. It is a further reason to make an order of the kind sought.
The second additional reason advanced by counsel for the defendants was that the plaintiffs brought the proceedings and failed. I think that is relevant to the consideration of the time remaining until the proceedings are disposed of. Beyond that, it does not carry much weight. That is particularly so in circumstances where, as counsel for the defendants has noted, there has not been delinquency or misconduct on the plaintiffs' part (see Fiduciary v Morningstar at [12]).
Counsel for the plaintiffs additionally submitted that there was a risk of unfair prejudice being visited on the plaintiffs. They relied on affidavit evidence of Tim from 16 June that had the restraints been enforced the business would "rapidly become insolvent". Counsel submitted that the proposed order assumes that the defendants could have to repay some of the amounts ordered, and the plaintiffs should not have to bear that risk.
Counsel for the defendants submitted that the evidence relied on by the plaintiffs regarding prejudice was out of date (having been sworn ahead of the interlocutory hearing), such that the Court should give it little weight. Counsel submitted that there have been significant changes in circumstances since, namely, that the defendants' business is trading, and the defendants intend to file a cross-claim for damages due to the injunctions.
I do not think there is sufficient evidence of a risk of unfair prejudice to preclude the making of an order of the kind sought.
The parties differed markedly on the quantum of any amount ordered to be payable on account. Counsel for the defendants submitted that an amount of $404,000 (incl. GST) should be ordered. Counsel for the plaintiffs submitted that this was excessive, and that an appropriate amount would be between $180,000 to $200,000.
The defendants relied on the affidavit evidence of Mr Watson, their solicitor on record. Mr Watson gave evidence on 22 December that the total professional fees and disbursements incurred by the Defendants in, or incidental to, the proceedings were $456,393.71 (excl. GST), or $501,751.48 (incl. GST). That figure was said to have been exclusive of legal costs incurred in relation to the costs application, advising on the defendants' commercial relationship and obligations to the plaintiffs due to the proceeding, and other matters. It was also confined to costs incurred shortly before, and from, the date of the commencement of the proceedings. The figure included $211,117.50 (incl. GST) in counsels' fees. The figure also included $285,092.00 (incl. GST) in solicitors' professional fees.
Mr Watson estimated, based on a perusal of invoices, that 95% of the costs invoiced directly related to the proceedings to date and were incurred of and incidental to the interlocutory hearing and/or the hearing on the preliminary question. Mr Watson considered it reasonable, and within the normal range, for a successful defendant to recover, on the ordinary basis, 75% of its solicitors' fees, 90% of its counsels' fees and 100% of its other disbursements. Applying those percentages, and excluding non-counsel disbursements, Mr Watson reached an estimate of $404,000 (incl. GST).
Counsel for the defendants relied upon the following factors in support of their proposed quantum. First, the fact that the amount was confined to costs related to those of and leading up to the interlocutory hearing and the preliminary question hearing. Second, that the discounts are appropriate given Mr Watson's experience of costs assessment. Third, that there is sufficient evidence (in the form of offers to resolve the proceedings on a final basis) that costs will eventually be ordered to be assessed on an indemnity basis, which should give the Court greater comfort in making an order for the amount sought. Counsel for the defendants also submitted that additional costs were generated by the expeditious nature of the proceedings, with involved two urgent hearings and a number of related interlocutory disputes.
Counsel for the plaintiffs relied on the following factors. First, that the defendants' costs are unjustifiably large. This was on the basis that the defendants' counsel fees are three times as much as the plaintiffs'. Affidavit evidence was filed to support this, of Mr Timothy Atkin, solicitor for the plaintiffs, of 21 February. Mr Atkin's affidavit set out the total professional fees and disbursements incurred between 1 June and 30 November 2022. Second, that some costs were incurred unnecessarily by way of putting on irrelevant evidence. Third, that many costs related to the proceedings generally, making the 5% discount inadequate. Fourth, that the amount should not include GST in circumstances where the invoices indicate all costs have been incurred by the fourth defendant (a trading company), which is presumably registered for GST and entitled to an input credit for its legal costs.
In reply submissions, counsel for the defendants further defended the amount of counsel fees incurred. Counsel explained that three barristers were briefed because the hearing date was inconvenient to Mr Kirby, due to a prior court commitment on days two and three of the hearing. Counsel noted that the fees of the replacement counsel, Mr Turnbull, were less than would have been the case had Mr Kirby appeared for the whole trial, owing to a lesser daily rate. Counsel submitted that briefing two counsel was justified based on the economic importance of the matter to the defendants, and briefing a further counsel was necessitated by the expedited hearing. Counsel referred to the plaintiffs having briefed senior counsel to appear at the preliminary question hearing, as indicative of the matter's importance. Counsel further submitted that the plaintiffs' submissions sought to compare the parties' costs, which was inappropriate when the ultimate assessment will focus on the reasonableness of the defendants' costs.
Mr Watson has effectively based his claim on the defendants' entire costs (less some specified exceptions), less an estimated 5% to represent general costs of the proceedings and other costs not covered by the subject orders. The 5% figure is unsupported by reasoning or explanation and is really a bare ipse dixit. Moreover, there is reason to think that Mr Watson has taken an incorrect approach in arriving at it. For example, at [29] of his December affidavit, Mr Watson dealt with the costs of preparing the defendants' pleadings. Mr Watson indicated that he only exempted specified parts of the pleadings from his estimates, which he estimated as not exceeding $5,000 in total. In my view, that analysis conflates the general costs of the proceedings and the costs of the separate hearing.
The further difficulty is that it is impossible, even using the broadest of brushes (see Omutta (No 2) at [13]), to fix what the level of discount should be. The Court has before it copies of invoices of the defendants' solicitors and counsel. A brief perusal of those invoices reveals many items of work which, from the description, might not be limited to the subject hearings. The Court, on an application of this kind, lacks the means to conduct some sort of assessment for itself, and could not be expected to do so even if that were possible. The quantum claimed and the gulf between the parties make it unsatisfactory for the Court to fix a figure based on its judgment and experience.
In the circumstances, it is tempting to refuse the order for a lump sum and order that the costs be assessed and paid forthwith. But as the 12 December orders could later be set aside and replaced by orders on an indemnity basis, I think that presents an unacceptable risk of duplication. I have therefore concluded that I should make an order for $200,000 to be paid on account of the costs liabilities in question. The $200,000 figure is the highest amount which counsel for the defendants submitted I should be prepared to entertain, and I cannot on the evidence presented justify any more.

Costs of application to vary undertakings

The defendants' motion to vary undertakings has been dismissed (see above at [17]). The defendants have been released from the undertakings previously made and have given amended undertakings (see above at [17]). The plaintiffs seek the costs of the motion. The defendants submit that the appropriate order is that there be no order as to costs.
The prior undertakings were summarised by Richmond J (J1 at [2]): After the proceedings were commenced the defendants agreed to give undertakings not to use the plaintiffs' confidential information and the first defendant agreed to give (and did provide to the court) an undertaking not to compete with the plaintiffs in substantially the same terms as the post-contract restraint under each franchise agreement.
Counsel for the defendants set out the chronology of the undertakings through from their provision to their variation. Counsel submitted that "Confidential Information" in the undertakings, was broadly defined because it picked up the definition of that term in the franchise agreements. Counsel referred to comments made by the plaintiffs' counsel before Richmond J: "But I hazard a guess that that is not what was intended by this undertaking, but nevertheless it's been given and your Honour will have to wear that in the balance". Counsel submitted that this indicated the plaintiffs did not think the defendants were binding themselves in a manner consistent with the full scope of the definition. Counsel noted that it later became apparent that there was a risk of non-compliance due to the breadth of the definition, presenting the need to amend. The risk, counsel submitted, was increased by the filing of the plaintiffs' motion alleging breach of undertaking.
The defendants' motion was filed on 26 October. Counsel for the defendants referred to correspondence between the parties preceding that date. On 20 October, the defendants suggested an amended form of undertaking. On 24 October, the plaintiffs indicated that, "If your clients want the Undertaking amended, the appropriate course is for your clients to file a notice of motion with supporting evidence". Counsel submitted that this response amounted to an unexplained willingness to consent to or negotiate a variation.
Counsel for the defendants referred to subsequent developments. First, that on 27 October, the plaintiffs suggested an amended variation. Counsel submitted that the proposed change was slight and could have been suggested on 24 October. Second, that on 18 November, the defendants proposed changes to the same paragraph that had been the subject of the plaintiffs' suggestion. Third, that on 6 December, the plaintiffs consented to the variation in the terms proposed. Counsel submitted that the eventual form differed very little from that proposed on 20 October.
Counsel for the defendants submitted that the exchanges between the parties were demonstrative of "an unnecessarily obstructive approach" from the plaintiffs, which produced the need for the motion in the first place, and that it was possible for the parties to achieve a variation by consent. Counsel submitted that had the plaintiffs negotiated from the outset, the costs of the motion could have been avoided. Counsel also noted that the defendants needed the variation in order to carry on their business without risking a breach of undertaking. In reply submissions, counsel submitted that the eventual variation had been proposed prior to the filing of the motion. Counsel submitted that the circumstances fell within the principles articulated in Re Minister for Immigration & Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 624-5. Counsel submitted that had the variation been made by consent without a motion having been filed, no costs order would have been made.
Counsel for the plaintiffs submitted that the defendants' submission was undermined by having recounted efforts of the plaintiffs to agree amendments. Counsel also submitted that it was not sufficient to argue that the defendants should not have been required to file a motion, and bear associated costs. The defendants had given the undertaking in order to avoid the making of orders preventing misuse of confidential information. Counsel submitted that if those undertakings were inconsistent with their intentions, the responsibility rested with the defendants to seek a variation by notice of motion. Counsel further submitted that the plaintiffs in the end did not oppose particular amendments, in recognition of the unintended effect of the undertakings. Nonetheless, counsel submitted that problems with wording were attributable to the defendants, who should bear the costs of correcting such.
The starting point is that the defendants sought an indulgence of the Court and should bear the costs of the motion. Nonetheless, there are circumstances in which that starting point is departed from. Justice Brereton set out the relevant principles in Chahwan v Euphoric Pty Ltd trading as Clay & Michael [2009] NSWSC 805 at [43], albeit dealing there with a contested application for leave to amend: On an application for leave to amend which succeeds, one starts from the position that the successful applicant for leave to amend pays the unsuccessful respondent's costs, the amendment being an indulgence granted by the Court, the costs associated with which could have been avoided had the applicant got the pleading right or complete in the first place. But the court may depart from that ordinary position, in particular where the opposition to the amendment is unreasonable, or where the opposition is on such a scale and to such an extent that it adds unnecessarily to the costs of the application. In such a case, the position involves balancing the relative responsibility of the respective parties for the costs associated with the amendment and the process of seeking leave to amend.
I see the force in counsel for the defendants' submission that the plaintiffs could have commenced negotiating a consent position immediately. Nonetheless, I do not think they acted unreasonably in putting the defendants to the costs of filing an application. The undertaking was made to the Court. It is for the Court to release the relevant party from the undertaking, but it can only do so if an application is made (see Application of Rinehart: 2020/142504 (No 2) [2021] NSWSC 364 at [121]). Moreover, there is nothing to suggest that the subsequent negotiations as to the form of the new undertaking were unreasonably conducted.
The principles articulated in Lai Qin were stated in the context of proceedings for substantive relief. I do not think they assist where the issue is whether opposition to an application for an indulgence was unreasonable. I will make an order that the defendants pay the plaintiffs' costs of the motion.

Orders

The orders of the Court are: 1. The plaintiffs pay to the defendants the sum of $200,000 on account of their costs liability under order 3 made on 12 December 2022. 2. The defendants pay the plaintiffs' costs of the defendants' notice of motion dated 24 October 2022.

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 May 2023

At a glance

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Judgment (6 paragraphs)

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Cases Cited (10)