New South Wales District Court CITATION: Redman v Verticon Group Limited (No 3) [2009] NSWDC 55 HEARING DATE(S): 9 - 13 March, 2, 8 April 2009 EX TEMPORE JUDGMENT DATE : 8 April 2009 JURISDICTION: Civil JUDGMENT OF: Goldring DCJ DECISION: The defendant to pay the plaintiff's costs on an indemnity basis CATCHWORDS: COSTS - indemnity costs - when ordered LEGISLATION CITED: District Court Rules Colgate-Palmolive Co v Cussons Pty Limited (1993) 46 FCR 225 Fountain Selected Meats (Sales) Pty Limited v International Produce Merchants Pty Limited (1988) 81 ALR 397 Harrison v Schipp [2001] NSWCA 13 CASES CITED: Baulderstone Hornibrook Engineering Pty Limited v Gordian Runoff Limited [2006] NSWSC 583 Commonwealth Bank of Australia v Saleh [2007] NSWSC 990 Calderbank v Calderbank [1975] 3 All ER 333 Elite Protective Personnel Pty Limited v Salmon [2007] NSWCA 322 Kooee Communications Pty Limited v Primus Telecommunications Pty Limited (No.2) [2008] NSWCA 85 PARTIES: Jason Redman (Plaintiff) Verticon Group Limited (Defendant) FILE NUMBER(S): 5716 of 2007 COUNSEL: J Berwick (Plaintiff) T Saunders (Defendant) SOLICITORS: Craddock Murray Neumann (Plaintiff) Deacons (Defendant) JUDGMENT 1 HIS HONOUR: In this case I delivered judgment last week in favour of the plaintiff. The plaintiff has now applied for three orders in the alternative. The first is that it be paid its costs on an indemnity basis in respect of the whole of the action. The second is that it be paid its costs on an indemnity basis after the expiry of an offer which it made in May 2008, and the third alternative is that it be paid indemnity costs as and from the date of a Calderbank offer made on 6 March, which was three days before the commencement of the hearing. 2 The circumstances which led to the first application were findings I made in my judgment that the managing director of the defendant made a decision summarily to dismiss Mr Redman, the plaintiff, in an effort to save costs at a time when his company was making significant losses and, as Mr Hipwell, the chief financial officer, said in his evidence in court, that the company was concerned to minimise its losses. 3 The grounds given originally for summary dismissal were grounds which alleged that Mr Redman was guilty of gross dishonesty, to put it mildly. Those allegations were not pursued in the defence which was filed, but in the defence which was filed the defendant purported to rely on other grounds which it said would justify summary dismissal, although it did say that it relied on the original letter in which Mr Redman was notified of his summary dismissal, and that included the serious allegations of fraud. It was not clear until the first day of the hearing, in my view, that the defendant was not proposing to press some, at least, of the matters set out in that letter, although fraud was obviously not one of the things that it would proceed with, because that matter was not pleaded and particularised as required by the Rules. 4 Nevertheless, the action proceeded on the basis of the defendant producing evidence, primarily from Mr Hipwell, which I found was not acceptable, and not in accordance with the facts. In my view, the evidence of Mr Hipwell resulted from directions that he had been given to conduct the defence, and to produce whatever reasons could be produced that would justify summary dismissal. That, in my view, involved a degree of fabrication to some extent, and a high degree of embellishment of the documentary evidence that was placed before me. 5 The court, under r 42.5, has a discretion to award costs on an indemnity basis. That rule does not set out what those grounds are. Those grounds must be found in the case law, and there is a considerable body of case law to that effect. In my view, the most succinct statement of the basis upon which indemnity costs may be awarded, is to be found in the judgment of Sheppard J in the Federal Court in the case of Colgate Palmolive Company and Colgate Palmolive Pty Limited v Cussons Pty Limited (1993) 46 FCR 225. His Honour was considering a number of rules. He cited extensively a case to which I was referred, Fountain Selected Meats (Sales) Pty Limited v International Produce Merchants Pty Limited (1988) 81 ALR 397, where Woodward J at p 441 set out a very succinct statement of the nature of the court's discretion. That was a case where charges of fraud were made out and not sustained. His Honour pointed out that in other cases the allegations of fraud had been made knowing them to be false, or where what Tadgell J in another case had described as 'high handed presumption'. Sheppard J, in the case of Colgate to which I refer, then considered a number of other cases, mostly in the Federal Court, and at para 24 he distilled some principles or guidelines which I propose to read: "1.The problem arises in adversary litigation, i.e. litigation as between parties that are at arm's lengths. Different considerations apply where parties may be found to be entitled to the payment of their costs out of a fund or assets being administered by or under the control of a trustee, liquidator, receiver or person in a like position, eg. a government agency or statutory authority. 2.The ordinary rule is that, where the Court orders the costs of one party to litigation be paid by another party, the order is for payment of those costs on the party and party basis." He referred to the Rules and continued: "In many cases the result will be that the amount recovered by the successful party under the Order will fall short of (in many cases well short of) a complete indemnity. 3.This has been the settled practice for centuries in England. It is a practice which is entrenched in Australia. Either legislation (perhaps in the form of an amendment to the rules of Court) or a decision of an intermediate court of appeal or of the High Court would be required to alter it. No doubt any consideration of whether there should be any change in the practice would require the resolution of the competing interests mentioned by Devlin LJ in Berry v. British Transport Commission and Handley JA in Cachia v. Hanes on the one hand and by Rogers J in Qantas on the other. The relevant passages from the respective judgments have been earlier referred to. 4. In consequence of the settled practice which exists, the Court ought not usually make an order for the payment of costs on some basis other than the party and party basis. The circumstances of the case must be such as to warrant the Court in departing from the usual course." And I omit some words there. His Honour continued: "Most judges dealing with the problem have resolved the particular case before them by dealing with the circumstances of that case and finding in it the presence or absence of factors which would be capable, if they existed, of warranting a departure from the usual rule. But as French J said (at 8) in a case called Tetijo, 'The categories in which the discretion may be exercised are not closed'. Davies J expressed similar views in Ragata ." In para 24. 5, Sheppard J went on to note some of the circumstances which have been thought to warrant the exercise of discretion, and I quote again: "I instance the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud (both referred to by Woodward J in Fountain and also by Gummow J in Thors v. Weekes (1989) 92 ALR 131 at 152; evidence of particular misconduct that causes loss of time to the Court and to other parties (French J in Tetijo ); the fact that the proceedings were commenced or continued for some ulterior motive (Davies J in Ragata ) or in wilful disregard of known facts or clearly established law (Woodward J in Fountain and French J in J-Corp ); the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions (Davies J in Ragata ); an imprudent refusal of an offer to comprise" - and he cites a number of cases. "Other categories of cases are to be found in the reports" and his Honour goes on to say that the particular facts of the case must be considered. 6 That case has been adopted and approved in general terms, most notably by the Court of Appeal in Harrison v Schipp [2001] NSWCA 13. There, the leading judgment was given by Giles JA. 7 One thing that was pointed out in this case is that the delinquency, if it occurs, must be delinquency arising in the conduct of the case, rather than some actions which occurred before the conduct of the case, which might result in the award of exemplary or punitive damages, and counsel may remember that at the conclusion of the hearing, I asked whether the plaintiff was seeking such damages and received a negative response. The rule in relation to indemnity costs is there to deal with the conduct of the case, and not conduct which occurred before the case was commenced. It seems to me that that decision of Harrison v Schipp has been followed more commonly than not, particularly by Einstein J in at least two cases. One was Baulderstone Hornibrook Engineering Pty Limited v Gordian Runoff Limited [2006] NSWSC 583 and the other was a case, Commonwealth Bank of Australia v Saleh [2007] NSWSC 990. At para 5, in that case, his Honour said this: "There is no doubt that the Bank is entitled to an indemnity costs order against Mr Edge. Not only was he one of the fraudulent conspirators, but significantly, he sought to rely in the proceedings on documents which were found to be fabricated. He persisted throughout the whole of the hearing in denying the bank's allegations in respect of his fraud: knowing those allegations to be true. This conduct par excellence constituted relevant delinquency. The case for a indemnity costs order against him is plainly a fortiori." 8 Now in this case, as I have said, the conduct of Mr Torrington, which originally led to the purported summary dismissal of the plaintiff, occurred before the proceedings commenced. As I have said, the allegations of deliberate fraud and misconduct were not pursued at the hearing, but other grounds were and those were grounds which were presented in the evidence of Mr Hipwell, in circumstances where I found that he knew, or ought to have known, that the plaintiff was not deliberately concealing anything, not engaging in any conduct which would justify a summary dismissal, but was put forward in order to maintain the position of the defendant, that the summary dismissal was justified. On that basis, it seems to me, that there is relevant delinquency in the conduct of the proceedings which would justify an order for indemnity costs, and I would so order. But I do need to deal with two other matters. 9 One is the fact that on 21 May 2008 the plaintiff's solicitors wrote to the defendant's solicitors in the following terms: "Without conceding in any way the validity of the matters raised in your letter of 9 May 2008, we are instructed our client will discontinue these proceedings on the condition that each party pay its own costs and mutually release each other from any claims arising out of the employment relationship, including the restraints on competition, business and consultancy referred to in the share sale and employment agreements. Please advise of your instructions within seven days." 10 On the same day, the solicitors for the defendants replied rejecting that offer but saying that: "We confirm that our client is prepared to resolve the matter on the basis that Mr Redman discontinues the proceedings with no order as to costs." 11 In other words, without giving the release, and I should add, that in evidence before me, was the agreement by which the defendants took over the business formerly conducted by Mr Redman, and not unreasonably, imposed on him some restraints on competition and seeking employment in a similar business for a period after the termination of his employment. 12 The solicitors for the defendant, at that stage, were concerned to maintain those restraints on competition. Mr Saunders argues that, of itself, that conduct on the part of the defendant was not unreasonable, and taken in isolation, I would have to say that was so. However, given the reasons which I have already delivered about the conduct of the litigation, whether or not that is relevant, is a moot point which I need not decide. 13 However, on 6 March 2009, that is the Friday before the matter was due for hearing, the plaintiff offered to settle on the basis of a verdict for the plaintiff for some seventy-six thousand odd dollars plus costs. That was expressly made on the Calderbank v Calderbank principles. Mr Saunders for the defendant says that the failure of the defendant to respond to that was not unreasonable given the shortness of time. In Elite Protective Personnel Pty Limited v Salmon [2007] NSWCA 322, the Court of Appeal dealt with this issue and, in particular, with the circumstances in which it was, or was not, unreasonable for a party to reject a Calderbank offer. The court spent considerable time on dealing with whether or not the offer was made inclusive of costs when, as Mr Saunders correctly conceded, that was a matter which I need not trouble myself with here. However, after considering a line of cases, the court said this at para 117: "It was open for acceptance for only one week at a time when there was no imminent trial. Further, the respondent's solicitors forwarded under cover of the same letter a quantity of economic loss material which it would have been necessary for the appellant's solicitors to assess." 14 I omit some words. The conclusion was that the indemnity costs order that the trial judge had made should be set aside. That was in the judgment of McColl JA with which, in general, Basten JA agreed. However, Basten JA was party to a subsequent decision of the Court of Appeal in Kooee Communications Pty Limited v Primus Telecommunications Pty Limited (No.2) [2008] NSWCA 85 where a similar question arose. Basten JA said this: "15. Viewed in the abstract, an offer which is made less than 23 hours before the commencement of a hearing and requiring acceptance within that period, would not appear to have been left open for a reasonable time. Against that, there are practical considerations which might support a different conclusion. The first is that each of the parties had made prior offers, that of Kooee having been the subject of explanation as to the method of calculation of the component parts. Secondly, less than two weeks earlier Primus had made an assessment of its own position which led it to make an offer to settle for an amount of $2.5 million, an amount $1.25 million above the first Kooee offer. The second offer by Kooee reduced that gap by $300,000. Both the figures and the timing suggest that Primus could have been expected to assess the second offer with reasonable expedition. 16. The practical circumstances which must have existed at the time the offer was made may be said to tend in either direction. Thus, it appears to be common ground, as the Court might have assumed, that the legal representatives of Primus were conferring in preparation for the forthcoming trial, throughout the period that the offer was open. While that may have facilitated an immediate consideration of the offer by advisers who were focused on the relevant issues, it may also be said that the provision of an offer the day before trial provided an inconvenient distraction from preparation of the case for hearing." His Honour pointed out at para 20: "In considering whether the time allowed for acceptance is 'reasonable in all the circumstances' once a trial commences, or indeed final preparation commences, three factors come into play. The first is that both parties may reasonably be expected to have a clear perception of the strengths and weaknesses of their positions, so that the reasonableness of a particular offer may be speedily assessed. Secondly, because significant costs will be accruing on a daily, even an hourly basis, there is a heightened incentive to respond within the time permitted. Thirdly, and counterbalancing the first factor, the need to address the terms of an offer, provide advice and obtain instructions, will often be a significant distraction from final preparation." His Honour goes on to consider how that principle applies. 15 It is certainly true, from what the Court of Appeal said in Elite Protective Personnel Pty Limited, that the making of a Calderbank offer does not necessarily involve an order for indemnity costs. But, in this case, because of the circumstances in which this offer was made on 6 March this year, when the parties were ready for trial and were fully conversant with the facts, it seems to me that the offer was reasonable. It is true that served with the offer on the same day were two unsworn affidavits, one from the plaintiff, Mr Redman and one from the former New South Wales Accountant, Mr Sokialis. Mr Saunders says that those affidavits contain significant new material but, with respect, I do not accept that. The affidavits were both supplementary and, in my view, did not significantly affect the issues to be decided in the case. If I had not decided to make an order that the plaintiff be paid his costs on an indemnity basis for the whole of the action, I certainly would have ordered that he be paid his costs on a party and party basis up to 6 March, and thereafter on an indemnity basis. 16 The order of the court is that the defendant pay the plaintiff's costs on an indemnity basis. ********** 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.