Redwood Anti-Ageing Pty Limited & Anor v Knowles & Ors

Judgment 1HIS HONOUR: These reasons principally concern the question of what costs orders should be made consequent upon the orders made on 10 May 2013. Before dealing with that issue there is an outstanding matter to dispose of. 2The second defendant had filed a cross-claim against Redwood claiming a sum of $12,869.86 plus interest. No submissions were advanced at the hearing in support of that cross-claim. It was effectively abandoned. It was agreed that the cross-claim should be dismissed and I order that the second defendant's cross-claim be dismissed. 3On 17 July 2007 McDougall J noted an undertaking given by Redwood by its solicitor that it would pay $10,000 to be held by Morgan Lewis Attorneys in a controlled moneys account pending resolution of the claim of the second defendant. Consequent upon the dismissal of the second defendant's cross-claim the plaintiff should be discharged from that undertaking. I order that the undertaking which is paragraph 1 to the short minutes of order noted by McDougall J on 17 July 2007 be discharged and I direct that the moneys paid into a Morgan Lewis controlled moneys account may be released to the first plaintiff. 4On the question of costs the plaintiffs failed in their claims against the second and third defendants. They failed on all of their claims against the first defendant, except for their claim for repayment of a loan of $42,500 plus interest. The defendants contend that that was a comparatively minor issue in the proceedings that did not take up much time and that in any event, that claim was within the jurisdiction of the Local Court such that the plaintiff should not be entitled to an order for costs in respect of that claim brought in this Court. 5The defendants sought an order that the plaintiffs pay their costs. The plaintiffs sought a variation of interlocutory costs orders such that there be no order as to interlocutory costs and they sought an order that otherwise the defendants pay 85 per cent of their costs as assessed on the indemnity basis. The principal reason for the order sought by the plaintiffs concerns the plaintiffs' attempt to have a separate determination of the question whether the arrangements between the parties contravened s 25 of the Pharmacy Act 1964 (NSW) and the effect of such a contravention. 6An application for a separate determination of the illegality issue had been brought on 1 April 2009. It was opposed by the defendants and was rejected by Bergin CJ in Eq on 8 May 2009 as premature. As noted in the reasons in my principal judgment the illegality issue was not pleaded by the defendants until the end of the hearing when they sought and were granted leave to amend their defences to raise that issue. Nonetheless, the plaintiffs knew that it was an issue that was likely to be raised by the Court and addressed it accordingly. 7There was no argument in relation to the relevant principles to be applied in making the costs determination. Under s 98 of the Civil Procedure Act 2005 (NSW) costs are in the discretion of the Court. Pursuant to r 42.1 of the Uniform Civil Procedure Rules the Court is to order that the costs follow the event unless it appears that some other order should be made as to the whole or any part of the costs. Where the plaintiff has succeeded on only one of a number of severable or dominant issues, the Court may, although it is not bound to, deprive the plaintiff of the whole or part of its costs or make orders for costs in favour of the defendants. I venture to repeat what I said in Dee-Tech Pty Limited & Anor v Neddam Holdings Pty Ltd (No. 2) [2012] NSWSC 517 at [27]-[34]: "27 It is true that the issues on the taking of the account on which Neddam Holdings failed were not 'clearly dominant'. They were nonetheless separate from the other issues on the taking of the account. There was a separate issue in respect of each type of charge. Success or failure on each type of charge had its own separate monetary consequence. Under s 98 of the Civil Procedure Act subject to rules of Court, costs are in the discretion of the court. Rule 42.1 of the Uniform Civil Procedure Rules 2005 provides: '42.1 General rule that costs follow the event Subject to this Part, if the court makes any order as to costs, the court is to order that the costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs.' 28 In Reid, Hewitt & Company v Josephs [1918] AC 717, Lord Finlay LC, with whom Lord Parmoor agreed, said (at 733) that: '... [T]he words 'the costs shall follow the event' mean that the costs are to be distributed according to the results of the several issues, while the party who is successful on the whole gets the general costs.' 29 However, later cases have adopted a more flexible approach to determining what is 'the event'. In Cretazzo v Lombardi (1975) 13 SASR 4, Jacobs J said (at 16): '... I would wish to sound a note of cautious disapproval of applications, which are being made with increasing frequency, to apportion costs according only to the success or failure of one party or the other on the various issues of fact or law, which arise in the course of a trial. ... But trials occur daily in which the party, who in the end is wholly or substantially successful, nevertheless fails along the way on particular issues of fact or law. The ultimate ends of justice may not be served if a party is dissuaded by the risk of costs from canvassing all issues, however doubtful, which might be material to the decision of the case. There are, of course, many factors affecting the exercise of the discretion as to costs in each case, including in particular, the severability of the issues, and no two cases are alike. I wish merely to lend no encouragement to any suggestion that a party against whom the judgment goes ought nevertheless to anticipate a favourable exercise of the judicial discretion as to costs in respect of issues upon which he may have succeeded, based merely on his success in those particular issues.' 30 In Waters v PC Henderson (Australia) Pty Ltd [1994] NSWCA 338; (1994) 254 ALR 28 Mahoney JA (at 330-331) approved of a statement in Ritchie that: 'Where the proceedings involve multiple issues the application of the rule that costs follow the event may involve hardship where a party succeeds on some issues and yet fails on others. Particularly is this so where, for example, a defendant succeeds on issues that occupied the bulk of the time taken by the proceedings. Nevertheless unless a particular issue or group of issues is clearly dominant or separable it will ordinarily be appropriate to award the costs of the proceedings to the successful party without attempting to differentiate between those particular issues on which it was successful and those on which it failed.' (see now Ritchie at [42.1.15]). 31 In that case, Priestley JA with whom in this respect Kirby P agreed, indicated a greater willingness to evaluate the outcome of distinct issues in making a costs order. His Honour said (at 331): '... I thought there was considerable force in the submissions for the appellant that it would have been not a particularly difficult task to make a quick evaluation of distinct issues that were before the referee and to make a somewhat more particular costs order than the trial judge thought appropriate.' Nonetheless, there was no error of principle in the judge taking a global view that the successful party was entitled to costs, although it failed on particular issues. 32 In Bostik Australia Pty Ltd v Liddiard (No. 2) [2009] NSWCA 304 the Court of Appeal (Beazley, Ipp and Basten JJA) said (at [38]): '[38] The principles governing the making of an order as to costs so as to reflect the time taken in dealing with a particular issue in which the successful party in the proceedings or on the appeal did not succeed were reviewed by this court in Elite Protective Personnel Pty Ltd v Salmon (No 2) [2007] NSWCA 373. Those principles may be summarised as follows: · Where there are multiple issues in a case the Court generally does not attempt to differentiate between the issues on which a party was successful and those on which it failed. Unless a particular issue or group of issues is clearly dominant or separable it will ordinarily be appropriate to award the costs of the proceedings to the successful party without attempting to differentiate between those particular issues on which it was successful and those on which it failed: Waters v P C Henderson (Aust) Pty Ltd (Court of Appeal, 6 July 1994, unreported). · 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 Ltd (No 2) [2007] NSWCA 306 at [24]. A similar approach is adopted on 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 (No 2) [2006] NSWCA 374 at [27]. · Whether an order contrary to the general rule that costs follow the event should be made depends on the circumstances of the case viewed against the wide discretionary powers of the court, which powers should be liberally construed: New South Wales v Stanley [2007] NSWCA 330 at [18] per Hislop J (with whom Beazley and Tobias JJA agreed). · A separable issue can relate to 'any disputed question of fact or law' before a court on which a party fails, notwithstanding that they are otherwise successful in terms of the ultimate outcome of the matter: James v Surf Road Nominees Pty Ltd (No 2) [2005] NSWCA 296 at [34]. · Where there is a mixed outcome in proceedings, the question of apportionment is very much a matter of discretion and mathematical precision is illusory. The exercise of the discretion depends upon matters of impression and evaluation: James v Surf Road Nominees Pty Ltd (No 2), citing Dodds Family Investments Pty Ltd v Lane Industries Pty Ltd (1993) 26 IPR 261 at 272.' 33 A costs order in favour of a successful party can be moderated to reflect its failure on particular issues, even if the successful party did not act unreasonably in raising or defending those issues (Permanent Trustee Australia Limited v FAI General Insurance Co Limited (Supreme Court of New South Wales, Hodgson CJ in Eq, 3 June 1998, unreported, BC9802305) at [10-[11]; Short v Crawley (No. 40) [2008] NSWSC 1302 at [32]; Corbett Court Pty Ltd v Quasar Constructions (NSW) Pty Ltd [2008] NSWSC 1423 at [25]-[32]). 34 In Bowen Investments Pty Ltd v Tabcorp Holdings Limited (No. 2) [2008] FCAFC 107 Finkelstein and Gordon JJ observed that fairness dictates how the discretion as to costs should be exercised. If an issue by issue approach will produce a result that is fairer than giving the successful party all of his or her costs, notwithstanding his or her failure on particular issues, then the issue by issue approach should be applied." 8The plaintiffs' principal contention that the defendants should pay their costs, notwithstanding that they failed against the second and third defendants and substantially failed in their claim against the first defendant, was principally based on the way the issue of illegality had been dealt with by the defendants. The plaintiffs do not contend that had the issue of illegality been pleaded by the defendants, they would not have proceeded with all or some of their claims. Their complaint is that the defendants ought to have consented to a separate trial of the illegality issue. They say that had that been done, there would have been considerable savings in time and costs. It is implicit in the plaintiffs' submissions that had the defendants consented to such a separate determination of the illegality issue the Court would have made such an order. The submission also assumes without, in my view, demonstration, that such an order, if made, would have reduced the time and costs of the hearing. 9I do not think it likely that even with the defendants' consent a judge would have made an order for the separate determination of the illegality issue. A determination of that issue would not have resolved the proceedings however the issue was determined. Thus, had the plaintiff succeeded on the issue of illegality, most of its claims would still have failed for the reasons which I gave. Had on a separate trial it been determined that the arrangements contravened s 25 of the Pharmacy Act and for that reason some of the plaintiffs' claims could not succeed, there would have remained other claims that the plaintiffs could have, and I think probably would have, pursued. They are the claims against Mr Knowles for the recovery of the loan debt of $42,500 and the copyright claims. Also I think Redwood could have pursued a claim against at least Mr Knowles for an account of profits in respect of its claim that he had misused Redwood's confidential information. 10In those circumstances, and having regard to the warnings given by the High Court as to the caution that should be applied before ordering a separate determination of issues, it is unlikely that any such order would have been made even had the defendants consented. Nor, in my view, would such a separate determination have resulted in any material savings in time or costs. Indeed, I think it likely that there would have been further delays and possibly an increase in costs. That would be so unless the defendants had agreed to the facts about their relationship which established illegality. But they did not. 11As noted in my reasons, Mr Knowles and Mr Boyd denied that the arrangement between them and ASA and PMC was as alleged by Redwood. Mr Knowles contended that from 2005 profits were not paid by way of marketing fees but that marketing fees were calculated essentially by reference to the expenses of marketing. In the absence of an admission by the defendants as to the nature of the arrangements or a statement of agreed facts, it would still have been necessary for there to have been a trial which would have covered most of the ground that was covered at the hearing in September and October 2012. There would then have been a need for a second trial to deal with the remaining issues. 12As I have said, the plaintiffs do not contend that they would have acted differently had the defendants pleaded illegality from the outset. It was not the defendants' failure to plead that issue which extended the hearing or, I infer, preparation for the hearing. 13Nor was it contended by the plaintiffs that the defendant should be deprived of costs because they were parties to an illegal arrangement. I think the plaintiffs were right in that respect. (See Pham v Doan [2005] NSWSC 201; (2005) 63 NSWLR 370 at [15].) A modification of what would otherwise be a usual costs order depends upon a party's conduct as litigant as distinct from the party's conduct that gives rise to the litigation (Mead v Watson [2005] NSWCA 133; (2005) 23 ACLC 718 at [9]; 720). 14However, the hearing, and also, I infer, the steps in preparation for the hearing, were extended to a significant degree by the position taken by the defendants and the evidence given by Mr Knowles and Mr Boyd as to the nature of their relationship with Redwood. For the reasons I have given, I have found that that evidence was untruthful. The position taken by both Mr Knowles and Mr Boyd increased not only the costs incurred by them, but the costs incurred by the plaintiffs. As I have said, in final submissions, Senior Counsel then appearing for the defendants did not seek to support the position taken by Mr Knowles and Mr Boyd in their evidence. Consistently with their obligations under s 56 of the Civil Procedure Act, the defendants should have admitted their arrangements with the plaintiff concerning the charging of marketing fees and should have admitted that what the plaintiffs called the "new Redwood Group structure" was adopted so that all profits generated by ACP would ultimately flow to Redwood. Had that been done, the hearing, and I think preparation, would have been substantially shorter and considerable costs would have been saved by both the defendants and the plaintiffs. 15In my view, in the case of the second and third defendants the prima facie position under r 42.1 is that they are entitled to their costs of the proceedings on the ordinary basis. However, their failure to admit the true nature of the relationship between the defendants and Redwood, resulted in an increase in costs to all parties. That should lead to a modification of the prima facie costs position. I think that the hearing time was extended by at least two days by reason of the untenable position adopted by the defendants. Contrary to the submission of counsel for the defendants, I do not think that that factor only bears on the question of how much of the defendants' costs the plaintiff should pay. In my view, fairness requires that in the assessment of much of the defendants' costs the plaintiffs should be ordered to pay, there should be a reduction to take account of the fact that the defendants have been responsible for causing the plaintiffs to incur costs that they should not have had to incur. 16Taking these matters into account and given that there must be a broad-brush approach to the assessment, the appropriate order is that the plaintiffs pay two-thirds of the costs of the second and third defendants. 17But for the plaintiffs' success on the issue of the $42,500 loan, I think that would also be the appropriate order as between the plaintiffs and the first defendant. But I think there should be a further reduction of the amount of the first defendant's costs that the plaintiff should pay to take account of the plaintiff's success on that issue. That issue did occupy a significant time during the hearing, particularly in the cross-examination of Mr Knowles. 18The first defendant relies on r 42.34 of the Uniform Civil Procedure Rules. That rule provides: "42.34 Costs order not to be made in proceedings in Supreme Court unless Court satisfied proceedings in appropriate court (1) This rule applies if: (a) in proceedings in the Supreme Court, other than defamation proceedings, a plaintiff has obtained a judgment against the defendant or, if more than one defendant, against all the defendants, in an amount of less than $500,000, and (b) the plaintiff would, apart from this rule, be entitled to an order for costs against the defendant or defendants. (2) An order for costs may be made, but will not ordinarily be made, unless the Supreme Court is satisfied the commencement and continuation of the proceedings in the Supreme Court, rather than the District Court, was warranted." 19Had the claim under the loan agreement been the only claim the plaintiffs made, then I accept that the plaintiffs should not have recovered any of their costs in respect of that claim if brought in this Court as the claim could have been brought in the Local Court. But r 42.34(2) refers to this Court's being satisfied that the commencement and continuation of "the proceedings" in this Court was warranted, not to its being satisfied that the commencement and continuation of the particular claim on which the plaintiff succeeded in this Court was warranted. 20Unless the Court was satisfied that the plaintiff was not warranted in commencing and continuing the proceedings other than the successful claim at all, then I do not think that r 42.34 applies. Although the plaintiffs were unsuccessful in the balance of their claims, it does not follow that commencement and continuation of the proceedings in this Court rather than the District Court was not warranted. Had the proceedings been commenced in the District Court it is likely that they would have been transferred to this Court by reason of the claims for equitable relief that the plaintiffs made. I do not think that r 42.34 affects the decision as to costs. 21Having regard to my assessment of the significance of the issue on which Redwood succeeded and the extent to which that issue involved time and cost in the hearing and in preparation, I think there should be a further reduction in how much of the first defendant's costs should be paid by the plaintiffs. I order that the plaintiffs pay 50 percent of the first defendant's costs. 22The costs of today are to be costs in the proceedings. 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: 13 June 2013