Rhino Rack Australia Pty Ltd v Hub Computing Services Pty Ltd

Claims and procedural history

1. Hub provided IT services to Rhino Rack between 2016 and October 2019. The services included hosting and management of Rhino Rack's virtual IT environment, data storage and back-up services, software licences and technical IT support. The services were provided pursuant to a written contract referred to by the parties as the "Managed Services Agreement" ("MSA").
2. In early 2019 Rhino Rack decided to transfer the provision of Hub's services to a different IT service provider. By September 2019 the MSA was about to expire but disputes had arisen about the handover to the incoming IT service provider. Rhino Rack commenced proceedings by way of summons seeking urgent interlocutory relief. Eventually in October a written agreement was entered into between Rhino Rack and Hub to cover the transition. It was called the "Transitional Services Agreement" ("TSA"). The TSA expired in April 2020.
3. In May 2020 Rhino Rack filed its statement of claim. The statement of claim was amended in June. Rhino Rack claims damages for breaches of contract. Alternatively, Rhino Rack claims damages for negligence, or damages or compensation under the Australian Consumer Law ("ACL"). These claims are based on two complaints about the services provided by Hub.
4. In 2019 Rhino Rack's engineering team created data which was stored on its virtual drive or server. In June 2019, Hub made changes to Rhino Rack's virtual drive which included expanding the storage capacity of the file store for the engineering data. Rhino Rack alleges that during this process, Hub did not retain a back-up of any of the engineering data created for the period 1 to 12 June 2019. It contends that as a result of the work, the data became corrupted and was ultimately lost.
5. In September 2019 Rhino Rack Australia experienced outages in its IT systems in Welshpool, WA, and Eastern Creek, NSW. Rhino Rack USA experienced similar IT difficulties in its Denver, Colorado office. The outages were resolved in late September-early October 2019. Rhino Rack alleges that the outages were caused by Hub, and that Hub did not remedy the issues promptly, resulting in reduced business function for the period.
6. In August 2020 Hub filed a cross-claim. The statement of cross-claim was amended in October. Hub claims damages for breach of contract. It contends that Rhino Rack had wrongfully terminated certain services under the MSA and TSA, and failed to pay termination fees pursuant to those agreements. Hub also claims that Rhino Rack breached the terms of a confidentiality agreement that was entered into in September 2018, and engaged in misleading and deceptive conduct in breach of the ACL.
7. The motions that came before me on 8 February 2021 focused on Hub's confidentiality and ACL claims. As part of its business, Hub had developed a consolidated environment and service to provide to its customers. This consisted of software products, hardware, networks, tools, services, methodologies and processes that Hub had integrated into a service delivery model ("Service Delivery Solution"). Hub alleges that the Service Delivery Solution gave it a competitive advantage in retaining Rhino Rack's business as against other IT service providers.
8. In August 2018 Rhino Rack requested Hub to provide information and to co-operate in a risk assessment and audit of Rhine Rack's IT infrastructure, services and processes. The audit was to be conducted by Deloitte. The information requested included information that was confidential to Hub, including information about the Service Delivery Solution, the identity of Hub's suppliers, its commercial relationships with them and the pricing of their products.
9. Hub and Rhino Rack entered into a written confidentiality agreement in September 2018. Under the terms of the agreement, Rhino Rack was not to disclose any confidential information without the prior written consent of Hub or for any purpose other than the purpose for which it was disclosed. After the agreement was entered into, Hub provided the information to Deloitte who prepared a report for Rhino Rack. The report was based on, and incorporated parts of, Hub's confidential information.
10. Hub alleges that between November 2018 and February 2019, Rhino Rack disclosed Deloitte's report to third parties in breach of the terms of the confidentiality agreement. It claims that the disclosure resulted in confidential information being communicated to its competitors. In effect, Hub contends that Rhino Rack used Hub's confidential information so as to put it in a better position to replace Hub as its IT service provider.
11. As I have mentioned, in October 2020 Hub amended its cross-claim to introduce a claim for misleading and deceptive conduct under s 18 of the ACL. Hub alleges that in August 2018, Rhino Rack Australia and Mr Shadlow made representations to it that the information being requested was for the purposes of a routine audit and would only be used for those purposes. Hub alleges that those representations were misleading and that Rhino Rack's true purpose was to use the information to replace Hub as its service provider.
12. In March 2019, John Kostakis was hired by Rhino Rack in the role of "Technology Business Manager". Hub alleges that in February 2019, Rhino Rack Australia and Mr Shadlow had conveyed to Hub an impression that notwithstanding the hiring of Mr Kostakis, the services provided by Hub would not be diminished. Hub contends that those representations were misleading because by that point, Rhino Rack had already made the final decision to replace the services provided by Hub with the services of another provider.

Interlocutory applications

1. Hub filed its original cross-claim in August 2020. Shortly afterwards, a notice to produce was issued by Rhino Rack. The notice sought the production of documents which were referred to in Hub's cross-claim. By way of notice of motion filed 22 September, Hub sought to have the notice to produce set aside.
2. On 29 September Rhino Rack filed a notice of motion seeking to strike out various paragraphs of Hub's cross-claim concerning the confidentiality claim. Before the motion was heard, Hub amended its cross-claim to introduce the ACL claim, but the amendments did not affect the paragraphs challenged by Rhino Rack. On 5 November I granted leave to Rhino Rack to amend its notice of motion so as to refer to Hub's amended cross-claim.
3. On 3 December Hub served a proposed further amended cross-claim. In this version, Hub referred to emails which had not been sent to Hub. Rhino Rack responded that the emails could only have been obtained by Hub as Rhino Rack's IT service provider. The suggestion was that by including the emails in its pleading, Hub had breached s 276 of the Telecommunications Act 1997 (Cth) and ss 108 and 133 of the Telecommunications (Interception and Access) Act 1997 (Cth). Rhino Rack advised Hub that it would seek to prevent the filing of the document.
4. The matter came before me on 9 December 2020. I ordered that Hub's proposed amended cross-claim be treated as confidential.
5. On 16 December 2020 Hub filed a notice of motion seeking leave to file a further amended cross-claim. All references to the contentious emails had been omitted, but the claims for breach of confidentiality and breach of the ACL remained. The matter came before me again on 17 December 2020. I adjourned the hearing of the various motions to 8 February 2021.

Hearing on 8 February 2021

1. The first motion for consideration was Hub's application dated 22 September 2020 seeking to have Rhino Rack's notice to produce set aside. By the time of the hearing, the paragraphs of Hub's amended cross-claim in question had fallen away. As it was no longer in the pleading, counsel for Rhino Rack did not press the notice to produce and the motion was dismissed. This left the two applications concerning the pleadings.
2. Rhino Rack's main contentions were twofold. First, it was submitted that the paragraphs relating to the claim for breach of confidentiality were embarrassing and disclosed no reasonable cause of action. Counsel for Rhino Rack submitted that the amended cross-claim did not, specifically and exhaustively, identify the specific items of information said to be "confidential" or the facts that make that information "confidential" in character.
3. Second, it was submitted that the introduction of the misleading and deceptive conduct claim under the ACL was defective. Counsel submitted that this aspect of the claim suffered from the same defects as the paragraphs on breach of confidentiality; namely, that Hub had made allegations without actually identifying what the particular items of information were.
4. I broadly agreed with these criticisms and counsel for Hub did not press the point. At counsel's request I granted leave to Hub to file a further version of the pleadings by 15 February. As a result, Rhino Rack's motion to strike out paragraphs of the earlier version of the cross-claim fell away. I did, however, reserve leave to Rhino Rack to apply to have any of the further amendments disallowed.
5. In each of the three motions, I ordered Hub to pay Rhino Rack's costs. This was not contested by counsel.

Application for lump sum payment order

1. At the hearing on 8 February I indicated that I would entertain an application for an order for payment of a lump sum by Hub on account of the costs awarded against it. I have in the past made such orders as an alternative to an order for immediate assessment of costs where that would have been appropriate (as to the applicable principles see Barrett J in Fiduciary Ltd v Morningstar Research Pty Ltd (2002) 55 NSWLR 1 at [10]-[13]). An order for payment on account also differs from a lump sum costs order under the Civil Procedure Act 2005 (NSW), s 98(4): see Omutta Pty Ltd v Wilson (No 2) [2019] NSWSC 401 at [13]. It operates in advance of, and does not displace, the ultimate assessment of the costs.
2. In this case, there are two questions for the Court to resolve. First, what should the quantum of the order be? Second, should a condition be placed on Hub, and if so, what should the nature and scope of the condition be?

Quantum of the order

1. The parties were directed to file any evidence and submissions on the question of quantum by 24 February 2021. The only affidavit in evidence is that of Alan Arnott, the solicitor for Rhino Rack.
2. Mr Arnott provided copies of invoices for the total professional fees and disbursements that Rhino Rack incurred as a result of the three motions, which amounted to $133,000 (excluding GST). This represents solicitor's fees, filing fees, printing costs and transcript costs of $63,000, and counsel's fees of $70,000.
3. Counsel for Rhino Rack argue that a discounted figure of $115,000 is an appropriate sum. This represents 75% of solicitor's fees, filing fees, printing costs and transcript costs, and 100% of counsels' fees, rounded down.
4. Counsel submit that although high, the discounted figure of $115,000 is reasonable and proportionate to the value of the case and the complexity of the issues involved. Counsel argue that Hub's claims for contractual and equitable breach of confidentiality, and its claim under the ACL, are factually and legally complex. It also submits that the pleading itself was a long and complicated document that required detailed scrutiny.
5. Counsel propose a discount of 25% on solicitor's fees and disbursements is reasonable in the circumstances. Counsel refer to two decisions on lump sum costs orders. In Simone Starr-Diamond v Talus Diamond (No 4) [2013] NSWSC 811 Slattery J applied a 20% discount, and in In the matter of Aquaqueen International Pty Ltd [2015] NSWSC 500 Black J applied a 30% discount.
6. Counsel for Hub submits that the figure of $133,000 is excessive and that a discount of 40-50% should be applied. This would result in a figure between $66,000 and $80,000. Counsel argues that this is a "small to medium general commercial dispute" and the applications did not require overlapping work from senior counsel, an experienced junior counsel, and two solicitors, both of whom were charged at top-of-the range rates which presumably reflected their expertise as technology lawyers.
7. In considering these submissions, I think it is important to go back to the rationale for making a lump sum payment order in the first place. The challenge by Rhino Rack to Hub's successive pleadings exposed structural deficiencies in them, which forced Hub to reconsider its case and reformulate aspects of it from the ground up. Hub has had to start again, or largely had to start again, on its cross-claim. In such circumstances, it is right that Rhino Rack should receive some recompense now for the wasted, or largely wasted, costs of the exercise to date.
8. In general, I would not wish to criticise the employment of counsel, including senior counsel, in such a pleading challenge. Improved focus on the real elements of a claim are always desirable, and the earlier it happens the better. Going through the successive versions of Hub's pleading so as to expose the problems was always going to be a process which was going to benefit from the application of forensic experience.
9. Still, the overall figure for the costs charged, as counsel for Rhino Rack themselves acknowledge, appears high at first glance. I do not however propose to drill down further into those costs, or to consider in detail the points raised by Hub and the replies by Rhino Rack. The task I am undertaking, because it will not finally determine the quantum of Hub's liability, permits an even broader brush than that which is used in fixing a lump sum under s 98(4).
10. In the exercise of my judgment I fix the figure to be paid on account by Hub at $80,000.

Stay pending payment

1. Counsel for Rhino Rack submit that Hub should not be permitted to take any further steps in the proceedings until the payment has been made. Counsel for Hub disputes this. He submits that the condition should be limited to the specific claims the subject of the pleading application, or alternatively the cross-claim.
2. I agree that the payment condition should not prevent Hub from taking steps to advance its defence. The applications all concerned the cross-claim only. But I think it would be too complicated to try to limit the condition to particular claims or issues arising on the cross-claim. I will order that proceedings on the cross-claim be stayed generally until the payment is made.

Orders

1. The orders of the Court are: 1. Order that the cross-claimant pay the cross-defendants the sum of $80,000 on account of its liability under the costs orders made on 8 February 2021 in the proceedings on the notices of motion filed 22 September 2020, 29 September 2020 and 16 December 2020. 2. Order that proceedings on the cross-claim be stayed until such payment is made.

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: 12 March 2021