This judgment concerns an application by the defendant for a special interlocutory costs order in proceedings pending in the Court. The defendant seeks orders for the immediate assessment and payment of costs thrown away as a result of amendments to the plaintiff's pleaded and evidentiary case.
The plaintiff is the proprietor of a hotel known as the Moore Park View Hotel in the inner eastern suburbs of Sydney. The defendant is a former manager of the hotel who was employed in that position between October 2012 and June 2015. In the proceedings, the plaintiff alleges that the defendant misappropriated monies from the takings of the hotel between about July 2013 and about May 2015. The plaintiff claims that more than $600,000 was misappropriated.
The proceedings have a long and unsatisfactory procedural history. They were commenced in March 2016. An application came before me in the Applications List in 2018 which was the subject of a judgment: Omutta Pty Ltd v Wilson [2018] NSWSC 135. In that judgment I set out the procedural history to that point. The plaintiff sought disclosure of documents from the defendant and also sought access to documents produced on subpoena. I refused the application for disclosure, but granted access to the subpoena documents.
In the course of the argument, counsel for the defendant criticised the conduct of the plaintiff's case to that point. Counsel submitted that, in particular, the plaintiff's case was unintelligible. In my judgment, I concluded that the defendant had a case to answer. But I also observed that that case did not emerge clearly from the plaintiff's Statement of Claim. There were problems with the evidence which had been filed on the plaintiff's behalf (and at that stage was supposed to be complete). In particular, the plaintiff was relying on a report prepared by a loss adjuster, Ms Celia Reichelt, which had been obtained when the plaintiff made a claim for recovery of the losses the subject of these proceedings from its insurer. Not surprisingly, given its provenance, Ms Reichelt's report did not comply with the Rules of Court or the requirements of the Evidence Act 1995 (NSW), s 79.
Following the delivery of my judgment, Mr Nicholas Maley, solicitor for the plaintiff, intimated that the plaintiff would make an application to amend the Statement of Claim and, possibly, to lead further evidence. I kept the proceedings before me to allow that application to come forward. It was delayed. When the matter came before me on 8 May, Mr Maley had only just briefed counsel and the foreshadowed application to amend the pleadings had not been filed. Counsel for the defendant, justifiably, was pressing to have the case fixed for hearing. Mr Maley indicated the plaintiff wanted to go on with the case, and noted that the limitation period had not expired.
In these circumstances it would have been open to the plaintiff to discontinue the existing proceedings and institute fresh proceedings. That would have resulted in an order that the plaintiff pay the costs of the existing proceedings, but it would have allowed the plaintiff, if determined to continue with the claim, to pursue the claim untrammelled by limitations arising from past procedural orders. I put to Mr Maley that rather than take this course the plaintiff could salvage something from the wreckage of the existing proceedings if I allowed the plaintiff to amend and reconstitute its case but made a hefty costs order against the plaintiff for all the costs that had been thrown away to that point. Mr Maley embraced this suggestion. Accordingly I made orders extending the timetable for the plaintiff to amend its Statement of Claim, but on the condition that the plaintiff first pay into Court a sum of money on account of the costs order which was to be made. I fixed that amount at $100,000.
The plaintiff paid this money into Court and subsequently applied, by Notice of Motion filed on 18 September, for leave to amend its Statement of Claim and to file further evidence. Although there were further delays, an amended Statement of Claim was filed and further evidence served on the plaintiff's behalf. At the suggestion of senior counsel who came into the matter for the plaintiff, the plaintiff also filed a narrative of facts so as to enable the defendant and the Court to understand its case.
The proceedings have now been fixed for hearing later this year. The matter has returned to me for the purpose of making costs orders as foreshadowed in May last year.
It is common ground that the Court should order the plaintiff to pay:
(1) the defendant's costs thrown away by reason of the amendment and the filing of further evidence; and
(2) the defendant's costs of the plaintiff's Notice of Motion filed on 18 September 2018 pursuant to which leave was granted to amend the Statement of Claim.
The question for the Court is whether further orders should be made for assessment and payment of these costs forthwith.
Initially, counsel for the defendant sought orders for the assessment of the costs on a gross sum basis, payable forthwith, and the release of the monies paid into Court to the defendant to satisfy the costs order. The gross sum claimed was about $140,000. This was resisted by counsel for the plaintiff.
Counsel for the plaintiff addressed me at some length about the principles applicable to orders for the assessment of costs on a gross sum basis. I do not find it necessary to go into those principles. Logically, the first question is whether the Court should make an order that the costs awarded against the plaintiff be assessable forthwith. If, but only if, such an order is appropriate, does the Court need to consider whether to make an order assessing those costs on a gross sum basis.
I am not disposed to make an order that the costs be assessable forthwith. The process of separating the costs thrown away and the other costs the subject of the order from the defendant's general costs of conducting the proceedings will, as the evidence before me shows, be complicated and probably contentious. If the defendant succeeds in the proceedings, it will be unnecessary. In that event, the defendant will receive an order for his costs of the whole proceedings, including the costs thrown away and the other costs the subject of the order, and it will be unnecessary to separate those costs out. Even if a gross sum order is made, there would still need to be some assessment. As well as being potentially unnecessary, this will only distract the parties from getting on with preparing the proceedings for trial.
In my view, a better approach to the problem is to consider whether to make an order for payment of a lump sum by the plaintiff on account of the costs which will be ordered by the Court. If such a payment is ordered, it will not limit the costs which can ultimately be recovered under the order, nor will it prevent the plaintiff from contending in due course that the proper amount payable is less. At the same time, if such an order is made it will give the defendant some recompense now for the costs which he has been forced to outlay unnecessarily. Because of the interim nature of the payment, there is no need for the Court to be precise in fixing the amount; it can be determined with the broadest of brushes without resolving disputes in the evidence.
When I put this proposal to the parties, counsel for the defendant indicated that it was acceptable to his client. No one suggested that the Court lacked power to make such an order.
This leaves two questions for the Court to resolve. First, is it a proper case for making an order for payment on account? And, second, if it is, what should the quantum be?
Counsel for the plaintiff submitted that no order for payment of an amount on an account should be made at this stage. Counsel pointed out that $100,000 has been paid into Court and will be available to satisfy any costs entitlement of the defendant in due course. Counsel submitted that there was no need to go any further.
If the plaintiff succeeds against the defendant in these proceedings, the defendant can be expected to have to pay the plaintiff's general costs of the proceedings. In the ordinary course, such costs would be set off against the costs which are now awarded in the defendant's favour. If an order for payment on account is made now, then the plaintiff will lose the benefit of that potential set-off. This may, depending on the defendant's financial position at the end of the proceedings, leave the plaintiff out of pocket.
On the other hand, the defendant has paid a very considerable amount of money by way of costs; some of those costs were paid some time ago and the proceedings have already taken too long to get to hearing; and the defendant is an individual facing what is in effect a commercial claim for recovery by his former employer's insurer.
The defendant is in no way to blame for the delay which has occurred, which has been solely attributable to the poorly conceived way in which the plaintiff's case was put forward. On balance, I consider an order for payment of costs on account should be made in recognition of the oppression involved in the way the proceedings have so far been conducted.
Mr Steven Chamos, the solicitor for the defendant, gave evidence by affidavit in support of the defendant's application for costs. Mr Maley, gave affidavit evidence in response. Mr Chamos then gave an affidavit in reply. The affidavits were read without objection and no application was made to cross-examine either solicitor.
The plaintiff's claim was particularised in its original Statement of Claim by reference to trading weeks. The particulars identified each trading week where the defendant had allegedly misappropriated cash takings, and the amount of the discrepancy. There were ninety-one weeks in all.
The evidence served by the plaintiff in support of its case consisted of takings records and other accounting records for the relevant trading weeks. There were also affidavits from Scott Doble, to whom the defendant reported at the time, and from the assistant manager, Ms Joan Williams. In addition, there was the report of Ms Reichelt.
The plaintiff's amended Statement of Claim abandoned claims for eleven of the weeks (according to Mr Maley, who provided a list of them; Mr Chamos said there were twelve but did not provide a list). According to Mr Maley the total value of the abandoned claims was only $1,252. For thirty-two of the weeks the dollar amount was changed. Many of these changes were minor, and the total effect was only a reduction of about $9,000. There were also changes to a number of the week starting dates, which according to Mr Maley were only made for consistency and had no effect on the quantum of the claims.
A further affidavit was filed from Mr Doble and further material was added to the tender bundle. Mr Maley stressed that Mr Doble's affidavit provided no further information beyond that contained in the earlier tender bundle. He also said that the further tender documents consisted of documents produced to the Court under subpoena by third parties, to which the defendant's legal representatives had had access. It seems that Ms Reichelt's report has not been replaced and the plaintiff will present its case of misappropriation by inviting the Court to draw inferences from the documentary record.
Mr Chamos explained that the defendant's legal advisers decided to review and analyse the plaintiff's original case by starting with one week and working through the claim for that week. The week chosen was the week ending 21 July 2013 (which, as it happens, was one of the weeks later abandoned). According to Mr Chamos, the costs incurred for that week comprised solicitors' fees of approximately $5,000 and counsel's fees of approximately $4,950. These figures reflected approximately eight hours of review and analysis by Mr Chamos and another solicitor in his office, five hours of review and analysis by counsel and a further five hour conference to jointly review related documents and discovered material.
Mr Chamos then used this figure as a basis for extrapolating the total costs thrown away. He started with the solicitors' costs for the week ending 21 July 2013 (thus excluding any allowance for counsel). For each week where the allegation was abandoned, Mr Chamos applied a discount of twenty per cent for "efficiencies likely to have been achieved as the reviews for each week progressed". Where the amount of the claim was changed, Mr Chamos applied what he described as an "arbitrary fifty per cent discount". Where only the date was changed he applied an eighty per cent discount. The total amount was $142, 567.88.
On the face of it, this seems a surprising way to arrive at an estimate for the costs thrown away. It is quite understandable that the defendant's legal representatives found it necessary to analyse one week in detail so as to be able to understand how the cash taking and accounting system worked, but any methodological problems in understanding the plaintiff's case should have been exposed as a result of that process. I say "any" methodological problems because it must be remembered that the defendant himself assisted in the analysis. Difficulties which the Court had in understanding the claim may not have been such a problem for the defendant's legal advisers given the defendant's familiarity with the hotel's record keeping systems.
I can see that it might have been reasonable to consider some other weeks, for instance to check whether the defendant was even at work at the hotel during those weeks, or if something else about the claim for that week stood out. But that seems to me to be quite a different exercise, the costs of which would bear no mathematical relationship with the costs of the first week analysed. And there would appear to have been little if any benefit in continuing the exercise for the weeks where only relatively small amounts were claimed. On Mr Chamos' calculations, he is inviting the Court to award over $40,000 for eleven (or ten) subsequently abandoned weeks where the total loss claimed by the plaintiff was only about $1,000. This seems quite disproportionate.
On the other hand, Mr Chamos' approach leaves out of account other heads of cost which the defendant would have had to incur as a result of the changes to the plaintiff's case. From beginning to end, the process of the plaintiff amending its claim extended from the delivery of my judgment on 15 February 2018 up until the hearing on 22 February 2019 when I was informed that all of the steps in propounding the plaintiff's revised case had been completed. Between those two dates there were four directions hearings. Counsel for the defendant appeared at each of them. Then there are the costs of this application for costs itself. I regard all of the defendant's costs associated with these hearings as costs thrown away by reason of the amendments to the changes to the plaintiff's case.
Perhaps it was thought that the extrapolation method used by the plaintiff would in effect cover these costs. If so, it would have been much better to have estimated them directly.
For his part, Mr Maley contested the reasonableness of the defendant's costs incurred for analysing the week ending 21 July 2013. Mr Maley's figure for the task was $850. Mr Maley also conceded costs thrown away of $1,000 for the defence to the amended Statement of Claim. Otherwise he did not engage with the claim beyond saying that there was no evidence that the costs for the other weeks had been incurred, and referring to the indemnity principle.
In reply, Mr Chamos explained a discrepancy between his time sheets and Mr Southwick's fee note for the analysis of the week ended 21 July 2013. Mr Chamos went on to say that "reasonably discrete" time records had been kept for the week ending 21 July 2013 because the particular week had been chosen for the initial analysis. He confirmed that the defendant had been invoiced and had paid the amounts claimed for that week. Concerning the other weeks he said:
Generally the time records I have kept do not specify the particular week for which work is being charged. There are some entries where a particular week or weeks being considered are identified. Further, when considering the affidavit of Cella Reichelt I would not indicate precisely which weeks were being considered. That is why I attempted to estimate the amounts in my earlier affidavit. I was also estimating the value of work thrown away not all work done on all of the weeks.
The position from the Court's point of view is unsatisfactory. In an application such as the present the starting point for any analysis, no matter how rudimentary, should be what the party entitled to costs has in fact spent. Mr Chamos' evidence only does this for the analysis of the week ended 21 July 2013. There is no clear evidence on what else was done by way of analysis of the other weeks and the costs involved in that; and there is no evidence at all to quantify other components of the costs thrown away such as Court hearings. On the other hand, there clearly would have been work done, and at significant cost. There was no objection on behalf of the plaintiff to the evidence from Mr Chamos which I have quoted above and no submission was made relying on the indemnity principle. In those circumstances, it is not realistic to ignore this other work and these other costs as Mr Maley did.
Too much time has already been spent on this unhappy litigious episode. It would be wrong to require the parties to produce yet further evidence and submissions. But it would also be wrong for the Court to shut its eyes to the fact that extensive costs thrown away have been incurred beyond the costs of analysing the plaintiff's claim for the week ending 21 July 2013. What I propose to do is to make some allowance based on the level of fees disclosed in Mr Chamos' affidavit and my own estimate of what work could credibly have been involved. This process will be imperfect but given that the figure for costs which I reach will be a provisional one, I think the imperfections are tolerable in the circumstances.
So far as the costs of the week ending 21 July 2013 are concerned, I find Mr Maley's estimate too low for the purposes of the present exercise. Given the confusion and lack of organisation in the plaintiff's case, I find it quite credible that the exercise of reviewing the week which was chosen involved a number of days work for both solicitors and counsel. I expect it would have been necessary to understand the hotel's record-keeping systems as a whole before embarking on the review. There may have been little overall change to the plaintiff's case but now that the plaintiff has recast its case by reference to the narrative of facts, and given the time that has passed, it is reasonable to suppose that when the defendant's legal representatives come to prepare the case for trial, they will have to start again.
While I do not approve of the method of extrapolating the solicitor's costs by Mr Chamos as a basis for assessing the other costs, I am prepared to accept that in fact an analysis has been done of other weeks and it would be unrealistic to think that the further analysis could have been done for nothing. Recognising that counsel was not involved, the cost for the solicitors in analysing the balance of the case could easily have been three or four times the cost of the initial analysis. A figure of $40,000 in recoverable costs is in my view plausible as a minimum. It may be a great deal more.
So far as the other elements of the costs thrown away are concerned, I think that a credible figure is $30,000 bearing in mind how long the amendment process took. Accordingly, the figure to be paid on account will be $70,000.
[2]
Orders of the Court
The orders of the Court are as follows:
Order that the plaintiff pay the defendant's costs:
(a) thrown away by reason of the amendment of the plaintiff's Statement of Claim and the subsequent filing of further evidence; and
(b) of the plaintiff's Notice of Motion filed 18 September 2018,
such costs to include the costs of attendance at the hearings on 3 April 2018, 8 May 2018, 26 June 2018, 23 November 2018, 22 February 2019 and 14 March 2019.
Order that the sum of $70,000 be paid to the defendant out of the funds paid into Court by the plaintiff on account of the plaintiff's liability for such costs.
[3]
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Decision last updated: 16 April 2019