Supreme Court New South Wales Medium Neutral Citation: HRX Pty Ltd v Scott [2013] NSWSC 451 Hearing dates: 22 February 2013 Decision date: 01 May 2013 Jurisdiction: Equity Division Before: Bergin CJ in Eq Decision: Order made against non-party Catchwords: [COSTS] - Where non-party company employing former employee of plaintiff company funds defence of proceedings against former employee - whether order should be made against that non-party to pay the plaintiff's costs of proceedings against former employee Legislation Cited: Civil Procedure Act 2005 Copyright Act 1968 (Cth) Cases Cited: Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807 Edwards Madigan Torzillo Briggs Pty Ltd v Stack [2003] NSWCA 302 FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340 Knight v FP Special Assets Ltd (1992) 174 CLR 178 HRX Pty Ltd v Scott (Unreported, Supreme Court of New South Wales, Bergin CJ in Eq, 10 August 2012) May v Christodoulou (2011) 80 NSWLR 462 One.Tel Ltd v Commissioner of Taxation (2000) 101 FCR 548 QBE Insurance (Australia) Limited v Hotchin [2013] NSWSC 315 Category: Costs Parties: HRX Pty Ltd (Plaintiff) Stuart Scott (Defendant) Talent2 Pty Ltd (Respondent) Representation: PS Braham SC/Y Shariff (Plaintiff) RM Foreman (Respondent) Clayton Utz (Plaintiff) Watson Mangioni Lawyers Pty Limited (Respondent) File Number(s): 2012/244445 Judgment 1The plaintiff, HRX Pty Ltd (HRX), was the employer of the defendant, Stuart Scott, until 31 January 2012. The defendant's contract of employment contained post-employment restraints preventing him from soliciting HRX's clients and from working in a competitor's business for a particular period. Talent2 Pty Ltd (Talent2) was the principal competitor of HRX. The defendant commenced employment with Talent2 during the restraint period. When HRX became aware of that employment it sought undertakings from both the defendant and Talent2 that, amongst other things, required the defendant to cease soliciting HRX's clients and to cease working for Talent2. 2The undertakings were not proffered and on 6 August 2012 HRX commenced these proceedings against the defendant. 3The proceedings were defended by the defendant up until 22 August 2012 during which time HRX incurred substantial costs in prosecuting its case, including seeking interlocutory orders. 4On 22 August 2012 Talent2 informed the defendant that it would no longer support him in his defence. It is common ground that the defendant was informed by Talent2 that his employment would be terminated if he did not resign. The defendant then tendered his resignation and immediately put forward a proposal to HRX whereby he agreed to unconditionally submit to the majority of the orders pressed for by HRX. 5By Notice of Motion filed on 11 October 2012, HRX seeks an order pursuant to s 98 of the Civil Procedure Act 2005 (the Act) that Talent2 pay HRX's costs of the proceedings. HRX contends that it has been successful in the proceedings and that Talent2 was the active party behind the defendant's unsuccessful defence of the proceedings. Background 6HRX and Talent2 compete against each other in the provision of human resources services. The Group General Manager of Operations for Talent2 International Limited, a parent company of Talent2, Sarah Galbraith, gave evidence that the services that are provided by Talent2 include what has been referred to as business process outsourcing and a range of recruitment services that span executive search, executive recruitment and recruitment managed services. Ms Galbraith's responsibilities as head of operations include dealing with employment issues that arise in respect of Talent2's employees. 7Prior to the defendant resigning from HRX in January 2012, a number of other employees of HRX had resigned and joined Talent2. There were previous proceedings in relation to those employees in the Federal Court of Australia. The defendant commenced employment with Talent2 on about 2 April 2012. He was employed and located in Perth, Western Australia. 8In mid-July 2012, when HRX became aware that the defendant was employed by Talent2, it instructed its solicitors, Clayton Utz, to write to Talent2's solicitors, Sparke Helmore seeking undertakings from Talent2 including that it would not permit, assist or counsel the defendant to perform work in any capacity for it prior to 31 January 2013 (the period of restraint that HRX claimed was enforceable). Other undertakings in respect of non-solicitation and acting in competition with HRX were also sought. 9Ms Galbraith became aware that HRX was threatening legal action in mid-July 2012. She asked the defendant (by email) whether he had breached any clause in his HRX employment contract such as approaching clients or taking HRX data. Ms Galbraith advised the defendant by telephone that Talent2 did not wish him to breach his obligations to HRX. The defendant advised Ms Galbraith that he had not taken any HRX "IP" and that he had not breached his post-employment restraints in any way, other than by working for Talent2. On 23 July 2012 Ms Galbraith instructed Sparke Helmore of these matters. 10It appears that there was some discussion between Ms Galbraith and the defendant in respect of his lack of memory of signing a contract with a 12 months restraint. The defendant advised Ms Galbraith that a copy of his employment contract with HRX was in storage and it was difficult for him to access it at that time. He claimed that the contract that he had signed had a 6 months restraint period. 11On 23 July 2012 in discussions with officers of Talent2 including the CEO, Mr Rawlinson, the defendant informed Talent2 that he could not contribute financially to defending any litigation. 12In a letter dated 24 July 2012 Sparke Helmore provided an estimate of its costs to Ms Galbraith. That letter included the following: Talent2 & Stuart Scott Advice and assistance regarding restraint of trade Thank you for your instructions in relation to the above matter. Confirmation of Work We confirm that you have asked us to provide you with advice regarding Stuart Scott and a restraint of trade. 13The letter then provided an estimate of the costs "to advise and draft, if necessary, correspondence to Clayton Utz". 14On 27 July 2012 Ms Galbraith asked Sparke Helmore if they would be "able to chat briefly re next steps" that she assumed would be to pursue the unenforceability of the restraint clause and the intent with respect to client/staff restraints. When Ms Galbraith showed the defendant the copy of the signed contract that had been sent to Talent2 by Clayton Utz with the 12 months restraint clause, the defendant suggested that the contract "might not be real". He claimed that he was sure his copy had only a 6 months non-compete restraint. 15Ms Galbraith claimed that on 27 July 2012 she said to the defendant: Stuart, this isn't just about waiting out the non-compete until next week. You might have to negotiate something with HRX. It is now time for you to start dealing directly with Sparkes to give them all of the facts so that we know where to go next and how we are going to respond. 16On 30 July 2012 Ms Galbraith sent an email to Sparke Helmore setting out the defendant's contact details. In that email Ms Galbraith advised that it was "now time for Stuart and the Sparkes crew to discuss the facts of the situation so we can formalise next responses". 17On 30 July 2012 Sparke Helmore wrote to Clayton Utz advising that they acted for Talent2 and the defendant. Sparke Helmore contended that the period of restraint was "unreasonably long" and that in their view HRX would not be successful in having the restraint clause upheld. 18On 31 July 2012 the defendant wrote to Ms Galbraith in terms that included the following: I left HRX with a USB that contained a number of proposals and info documents (I used this while working at HRX as I travelled frequently) I haven't used any of this information since joining T2. Prior to leaving I emailed some spreadsheets that I had compiled regarding Perth business information (employee numbers, yearly revenue) to my personal address as well as some links to company career sites. I did not use these and subsequently deleted them all 19On 31 July 2012 Clayton Utz sought confirmation from Sparke Helmore that it had instructions to accept service of process on behalf of both the defendant and Talent2. 20On 31 July 2012 Sparke Helmore provided Ms Galbraith with an estimate of costs to defend an injunction application and asked if she still wished to have a summary of where Sparke Helmore were "at" with the defendant's matter. 21On 1 August 2012 Ms Galbraith wrote to the defendant asking when he deleted the documents referred to in his communication of 31 July 2012. On the same day the defendant advised Ms Galbraith and Sparke Helmore that most of the emails were deleted "months ago". He provided a copy of a spreadsheet with information that he had sent to his personal email address while he was working at HRX. 22On 2 August 2012 Sparke Helmore advised Clayton Utz that the firm had instructions to accept service of process on behalf of Talent2 and the defendant. 23On 3 August 2012 Sparke Helmore wrote to Clayton Utz contending that the restraints within the defendant's contract of employment and the undertaking sought by HRX were unreasonable. On 3 August 2012 Clayton Utz responded, advising, inter alia, that the firm had serious concerns about how Sparke Helmore could act for both the defendant and Talent2. That letter included the following: The evidence relied upon by our client will contain highly confidential material. Talent2 and HRX are of course direct competitors and it is unclear how your office can advise Talent2 without disclosing elements of that confidential information. 24On 3 August 2012 Sparke Helmore advised Ms Galbraith that the defendant had informed them that he did not have the money to spend on independent advice. 25On 6 August 2012 Sparke Helmore formed the view that the information on the USB drive was in breach of the defendant's employment contract with HRX. 26On 6 August 2012 the in-house group legal counsel of Talent2 wrote to Sparke Helmore in the following terms: This email serves as formal acknowledgement that Talent2 Pty Ltd ACN 105 143 324 ("Talent2") has directly engaged me to advise on Stuart Scott's present employment with Talent2, and specifically if his employment is to continue in the event Talent2 forms the view that he has breached any of the terms of his employment agreement with Talent2. 27On 6 August 2012 Clayton Utz wrote to Sparke Helmore advising that it had come to HRX's attention that after the defendant had engaged in discussions with Talent2 in 2011 about possible employment with Talent2, he had forwarded certain emails from his HRX work email address to his own personal email address. Clayton Utz requested a response to these allegations. 28HRX commenced proceedings against the defendant on 6 August 2012. On the same day Clayton Utz served a Summons and supporting affidavits, a Notice to Produce and a Subpoena on Sparke Helmore. The relief sought in the Summons included orders restraining the defendant from working in competition with HRX (the non-compete relief) and from soliciting HRX's customers (the non-solicit relief). It also included a claim for damages. 29On 6 August 2012 Sparke Helmore wrote to Ms Galbraith enclosing the Summons and materials as served and advising as follows: And so it begins... Talent2 have not been joined to the proceedings at this stage. There are confidential exhibits which the other side do not want Talent2 to see. These have not been served yet. There are two affidavits which I will forward separately. 30On 6 August 2012 Ms Galbraith had a teleconference with the lawyers at Sparke Helmore during which she was advised as follows in relation to the content of the USB drive: I can't express an opinion or give you advice on this, but, informally, the information is of a type that might make Talent2 reconsider whether Stuart should continue to be employed with Talent2. It would be improper for Sparkes to advise Talent2 on whether to reconsider Stuart's employment as we are acting for Stuart as well as for Talent2. We've reached the point where your interest and Stuart's aren't completely in alignment anymore. You should retain separate counsel to determine how Talent2 wants to proceed. 31On 8 August 2012 Talent2 wrote to Sparke Helmore in terms that included the following: Can you please provide a full estimate of fees including cost of counsel matching those costs to a timeline of events that may occur in this process. Also as this process continues can you please provide me with a brief weekly summary of our cost position. We need to be constantly aware of our exposure. 32In response to that email Sparke Helmore advised as follows: We will make arrangements in this regard: as things are flat out at this time, I suggest we provide this to you initially on Monday after the matter has been before the Court on Friday afternoon. In the meantime I think it would be useful if Sarah W [Sparke Helmore] and I could have a telephone conference with you and Sarah G [Ms Galbraith] tomorrow or early Friday depending on both your availability. In the meantime I attach two letters received from Clayton Utz since 8:30 pm tonight - please note the attached Amended Summons. Sarah W spent more than 5 hours with Mr Scott today and the matter, as can be the case involving these types of claims, is evolving swiftly. It would be helpful to review our (your) strategy and your desired outcomes bearing in mind what's taking place (and going to take place) before the court tomorrow and Friday. 33On 9 August 2012 Ms Galbraith responded to Sparke Helmore's email of 8 August 2012 in the following terms: Given the potential ongoing exposure here, David and I believe that we should ask our CFO Martin Brooke to join us in the call to confirm desired outcomes. He will confirm some potential times when we are available to talk today. 34On the afternoon of 9 August 2012 Sparke Helmore consulted with Talent2 (including Ms Galbraith) in a telephone conference. The conversation during that conference included the following (Sparke Helmore participants identified as "SH" and Talent2 participants identified as "T2"): T2: What are the prospects of this matter going away for Stuart tomorrow and is Stuart going to be able to work for Talent2? SH: It is unhelpful that Stuart has taken HRX data. The core matter for Talent2 is the non-compete. Arthur Moses [Senior Counsel] is confident that a twelve month restraint is unreasonable in Stuart's circumstances. It would be sensible to do a full investigation on what had happened with the data. This will include talking with people who had received the data to see if any breaches had occurred and to determine the extent of potential damage from the data Stuart had taken and make sure Talent2 hasn't prospered. T2: Stuart has acted imprudently by taking the data, and by sharing it with colleagues, but that he didn't do it with malicious intent, he was merely seeking to impress colleagues in his new workplace. Given termination of Stuart's employment will have significant impact on his life, Talent2 is not prepared to terminate his employment without serious consideration being given to all facts. David and I are already reviewing emails and investigating from having to comply with subpoena and responding to Clayton Utz. We will continue our investigations. 35On 10 August 2012 HRX made an application for an interlocutory injunction restraining the defendant from working for Talent2 and from soliciting HRX's clients. The validity of the restraint was identified as the real issue for determination in the proceedings. In attempting to assist the Court with an estimate of time for a final hearing, counsel for Talent2 said (Ex A: tr 4, 17): Our cross-examination of the deponents on a final hearing would go to issues such as the reasonableness of the restraint and what is the legitimate business interest being protected. My learned friend quite correctly articulated that this is to be seen in the context of a battle between HRX and Talent2 and this restraint that is now being sought to be imposed by the plaintiff has been refashioned as late as yesterday to direct it towards the defendant not working for Talent2. ... So we don't know what it is that they are concerned about other than what appears to be a continuing war between two corporations. 36The proceedings were fixed for urgent final hearing for three days commencing on 3 September 2012. An interim injunction as sought was refused. However a more limited restraint was granted, restraining the defendant from dealing with HRX's clients: HRX Pty Ltd v Scott (Unreported, Supreme Court of New South Wales, Bergin CJ in Eq, 10 August 2012). On 16 August 2012, the hearing on 3 September 2012 was vacated and, by consent, the matter was listed for three days commencing on 4 September 2012. 37On 14 August 2012 Sparke Helmore wrote to Talent2 in the following terms: Because there's no evidence that Mr Scott used HRX's confidential information to Talent2's benefit or HRX's detriment. We are arguing the line that was successful in the Stacks case (paragraphs 61-64) which is that the undertaking and solicitation restraints he's prepared to agree to weigh against the need for a non-compete covenant. Happy to discuss if you like. In any event, we look forward to your instructions. Finally, in the event Talent2 decides not to fund Mr Scott, we'd need to speak to him and confirm whether he can continue to fund his own defence; if not, we couldn't continue to act. He would then have to act on his own behalf or retain other representation. 38On 14 August 2012 Talent2 was provided with information that the media had been consulted in relation to the dispute with HRX. Ms Galbraith wrote to Sparke Helmore advising that Talent2 was very concerned about the "element re media". Ms Galbraith then advised that she would be back in contact once Talent2 had a chance to "regroup and determined (sic) our perspective on moving forward". 39Clayton Utz served a subpoena on Talent2 that was the subject of debate between Sparke Helmore and Clayton Utz between 15 August 2012 and 20 August 2012. The timetable for the defendant's evidence required him to file and serve his affidavit by 24 August 2012. 40On 20 August 2012 HRX filed and served an Amended Summons. In addition to the non-compete relief and non-solicit relief in the original Summons, it included an alternative claim limiting the non-compete relief to employment with Talent2. It also included claims for delivery up of documents containing HRX's confidential information. It also included a claim for declarations that certain information, referred to as "Intellectual Property", was protected by the provisions of the Copyright Act 1968 (Cth) and that the defendant had breached HRX's copyright. 41On 20 August 2012 a conference was held between Talent2 and Sparke Helmore and the defendant. During that conference Talent2 advised the defendant that he was employed "in good faith" and that if serious breaches of the restraints were identified he would need to defend the allegations himself. 42On 21 August 2012 Sparke Helmore wrote directly to the defendant thanking him for his instructions in relation to the proceedings and providing him with a disclosure of fees with an offer of a Cost Agreement. That letter included the following: We confirm our initial advice that our costs (excluding GST and disbursements) for acting on your behalf though (sic) to the initial application made by HRX on 10 August 2012 was $30,000. We note that on 10 August 2012 we resisted the order that you cease working for Talent2 and the matter was stood over for further hearing for 3 days on 4-6 September 2012 on the interlocutory issue concerning your restraint and, possibly, then to a later date for any argument concerning damages. Our estimate for further work undertaken to date, since 10 August 2012, and continuing to the date of hearing is $40,000. We also attach counsel's retainers relating to this matter. We note counsel's fees for Mr Mahendra up to and including 14 August 2012 (including GST) are $12,973.13 and Senior Counsel's fees for Mr Moses up till 16 August 2012 (including GST) are $27,011.88. We estimate combined further fees for counsel through to hearing on 4-6 September in the region of $50,000. ... 6. Potential Assistance from Talent2 In relation to this matter, we note that while you are instructing us, Talent2 have indicated that they may fund your defence. We suggest you provide Sarah Galbraith with a copy of this letter and any invoices we forward to you for consideration in this regard. Please advise us immediately if Talent2 advise you of any decisions concerning this funding and we will need to ascertain your continuing agreement to these (sic) fund these proceedings in the event that they decide not to assist with these arrangements. 43On 22 August 2012 a meeting took place between the defendant and Talent2. The representatives of Talent2 at the meeting were Mr David Patteson (Company Secretary of Talent2) and Ms Galbraith (by telephone). Ms Galbraith's note of the conversation at the meeting included the following: Patteson: We're here to discuss case with HRX; we have had lots of discussions at senior levels re the case, we have to do this with our new board; in short, Talent2 is unable to fund case going forward - this is due to quantum of items that have come up during discovery, Talent2 has been subpoena'd as you know, and we carry some risk; originally we provided support to you because we thought there was strong case to answer; however, as further evidence has been discovered, there has been a big concern re all the evidence that you have actually breached your restraints - for example client solicitation and client data shared inside Talent2 Defendant: I don't blame Talent2, I can't afford to support the case on my own; its not a surprise; I'm prepared to take this on the chin; I'm happy to find an alternate arrangement; I would love to work for Talent2 again at some point in the future if you would entertain that Patteson: if the case can't continue to be fought in the courts, our advice is that we cannot continue to employ you; we are open to discuss what that means for your employment, open to consider resignation or termination; with respect to future employment, we can't talk about that; we are bound by actions that we have to take right now; we are considering all evidence that we have seen Defendant: I'm not too surprised, I've made a dumb mistake, I tried to stay away from prior clients but clearly not enough; I've got no one to blame but myself; I appreciate Talent2's support; I genuinely enjoy working here; I think I've been making momentum with clients; I'm the one that has ruined the opportunity with Talent2 Patteson: you can have time to consider how to terminate your employment if you need it Defendant: I will tender my resignation; I created this situation so I need to help you get out of it; I want to leave professionally as possible; I want to handover as well as possible to allow the opportunities I've uncovered to continue; I think they will be able to continue 44At this meeting the defendant wrote out and signed his resignation letter effective immediately. 45On 23 August 2012 Sparke Helmore wrote to Talent2 in the following terms: We refer to the above matter and our initial letter dated 24 July 2012 which estimated our legal costs would be up to $2,500. This estimate was provided on the basis of costs to review letters from and prepare letters to Clayton Utz about the restraint provisions of Mr Scott's contract with HRX Pty Ltd. We enclose our invoice in the amount of $4,364.80 which exceeds our initial estimate. The reason for this is largely related to the refusal of HRX Pty Ltd to negotiate a reasonable restraint, and production of the USB by Mr Scott, which affected the negotiations. 46On 23 August 2012 Sparke Helmore wrote to the defendant in terms that included the following: We enclose our invoice dated up to 10 August 2012 in relation to the interlocutory injunction in the amount of $27,042.00 plus GST. We have also included invoices from Senior Counsel up to 16 August 2012 and Junior Counsel up to 21 August 2012, in the combined amount of $37,366.25 plus GST. We have negotiated an arrangement with junior counsel whereby he has applied a 20% discount, if fees are paid within 7 days. The total amount payable is $72,971.69. 47On 4 September 2012 the parties settled their differences and Consent Orders were made pursuant to which the non-compete relief and the non-solicit relief were granted for the period of 12 months from 31 January 2012. The Consent Orders also required the defendant to deliver up HRX's confidential information and to provide an affidavit identifying the confidential information that he accessed, to whom it was provided, its location and how it was used. Costs were reserved. The Application 48On 11 October 2012 HRX filed the Notice of Motion seeking the order pursuant to s 98 of the Act against Talent2. The application was heard on 22 February 2013 when Mr PS Braham SC, leading Mr Y Shariff, of counsel, appeared for HRX and Mr RM Foreman, of counsel, appeared for Talent2. 49During cross-examination on this application, Ms Galbraith indicated that Talent2's desire to continue to fund the litigation was certainly linked to its prospects of success, because Talent2 wished to continue to employ the defendant (tr 61). She also gave the following evidence (tr 61-62): Q. You knew there was a risk? A. A risk of what? Q. A risk of losing the case? A. Risk of the non-compete agreement being upheld, yes. Q. You were considering the cost of running the case, weren't you? A. Yes. Q. The potential benefit to Talent2 of winning the case, correct? A. Yes. Q. And the potential downside of losing the case? A. Yes. 50Ms Galbraith was cross-examined in relation to the existence or otherwise of an information barrier in respect of the legal services being provided to Talent2 and those being provided to the defendant and gave the following evidence (tr 64): Q. Why didn't you say, "hang on a minute, we should be asking Mr Doepel, he's our lawyer, there is an information barrier in place"? A. As the information barrier had been explained to me, it didn't preclude us from talking with Mr Hassle [Hassal] and Ms Wood completely. It just meant that they couldn't seek any form of communication from us with respect to how they determined Stuart Scott's defence. Q. The reality is there was no information [barrier] within Talent2? A. Between which parties? Q. Between anyone within Talent2? A. No. Q. You continued to deal with both branches of Sparke Helmore in respect of their separate tasks, didn't you? A. We predominately dealt with Sarah Wood and Roland Hassle [Hassal] with respect to our costs and our costs from Sparke Helmore. 51Ms Galbraith gave the following evidence in cross-examination in relation to Talent2's decision to fund Mr Scott's defence of the litigation (tr 69-70): Q. You were aware that Sparke Helmore was concerned about whether he had complied with his obligations to HRX in respect of the information on the USB drive? A. I can't recall - yes, I guess so. Q. And yet in that context Talent2 made a decision to fund Mr Scott in the proceedings that were to be brought by HRX? A. Yes. Q. And it did it because you and others within Talent2 identified Talent2 as having an interest in those proceedings? A. In part, yes. And in part because I believed that Mr Scott was, had not behaved inappropriately because he had given assurances that he had not, that he had been in possession with a USB but had not done anything with that data. Q. On 20 August Talent2 considered those factors again better informed by additional information that had come into its possession and reached a different view, correct? A. We considered additional information, yes. Q. You formed the view that Stuart Scott would likely be unsuccessful in the proceedings, didn't you? A. There was a stronger chance of lack of success, yes, on the, on the noncompete restraint. Q. The likely cost of running the proceedings had increased from initial expectations, correct? A. Yes. Q. Talent2 didn't have an interest in running the case if it was going to be lost, did it? A. Not in the short term, no. Q. And so for those reasons Talent2 made a decision to cease funding Mr Scott's defence of the proceedings, correct? A. It was certainly a factor, it was not the only factor. Q. What were the additional factors? A. As I mentioned before, Talent2 was in the process of delisting from the Australian Stock Exchange. Our company had declared a loss for the financial year, we were watching costs very, very tightly. A simple ability to fight a battle against, dare I say, an opponent who was delivering a barrage of emails and formal letters on a daily basis, we simply could not afford to continue. That was the perspective of senior management. Q. Did that change between 6th and 20 August? A. What changed was the quantum of the bill. HER HONOUR: Q. From what to what? A. We started out seeking some advice on restraints. We were given a quote of about 2 and a half thousand dollars. Fairly quickly, within about three or four days that escalated to about $10,000 to defend Mr Scott at an injunction hearing, hearing an injunction. A few days after that we were on $30,000 and then literally, not, it didn't feel like, maybe a few days beyond that we were beyond $70,000. So it felt, the discussions internally with senior management were that, is there an end to this. HRX appeared not to be prepared to give up. 52In clarifying the arrangements in respect of the payment of the costs, the subject of Sparke Helmore's letter to Mr Scott on 21 August 2012, Ms Galbraith gave the following evidence (tr 71-72): Q. Yes. So am I right in assuming that this must be a mistake because up to 20 August you were going to pay the bills, that is T2 was going to pay the bill? A. I can recall a conversation with Sarah Wood later, I can't recall on which specific dates, in which I said "did you send the bill to Mr Scott?" Because I got a call from Mr Scott, very upset to receive the bill. And her explanation was because Mr Scott was their actual client, even if Talent2 paid the bill it had to be sent to Mr Scott. Q. I see. But it was intended at all times up to 20 August, am I right, from the evidence you gave in effect a little earlier that at least up to the $69,985 Mr Scott would not have to pay that? A. Yes. Q. And it was the balance, the additional estimate of 10,000 plus the 50,000 up to trial that he was at risk for? A. I, I believe so. 53Ms Galbraith gave evidence in re-examination that the invoice sent to the defendant under cover of Sparke Helmore's letter of 23 August 2012 in the amount of $72,971.69 was paid by Talent2 (tr 72). Consideration 54Where a matter does not proceed to determination after trial, the ordinary "benchmark" for the award of costs following "the event" is absent. However if the Court is satisfied that one party has had a "substantial victory" and the other a "substantial loss" even where there has been no determination on the merits, an award of costs may be made in favour of the successful party: Edwards Madigan Torzillo Briggs Pty Ltd v Stack [2003] NSWCA 302 at [4]-[5] per Davies AJA (with whom Mason P and Meagher JA agreed). In One.Tel Ltd v Commissioner of Taxation (2000) 101 FCR 548 Burchett J said at 553: In my opinion, it is important to draw a distinction between cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event or settlement so removes or modifies the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs. In the former type of case, there will commonly be lacking any basis for an exercise of the Court's discretion otherwise than by an award of costs to the successful party. It is the latter type of case which more often creates problems, since there may be difficulty in discerning a clear reason why one party, rather than the other, should bear the costs. ... If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the costs of the proceedings: Re Minister for Immigration and Ethnic Affairs (Cth); Ex parte Lai Qin (1997) 186 CLR 622 at 625 per McHugh J. 55As more applications are made for costs orders against third parties under s 98 of the Civil Procedure Act 2005 the principles have been stated and restated. Under s 98(1) the Court has "full power" to determine by whom, to whom and to what extent costs are to be paid. The guiding principle is whether an order would be in the interests of justice with the Court exercising its full power judicially: Knight v FP Special Assets Ltd (1992) 174 CLR 178; QBE Insurance (Australia) Limited v Hotchin [2013] NSWSC 315 at [54]-[58]. 56Factors for consideration in determining whether an order should be made under s 98 of the Act include: that the non-party played an active part in the conduct of litigation; that the non-party funded the litigation; that the non-party had been the cause of the proceedings in that such proceedings would not have been undertaken had it not been for the non-party's intervention; that the unsuccessful party to the litigation is a "man of straw"; and that the non-party, or its principal, had a substantial interest (not necessarily financial) in the litigation: FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340 at [210]-[214] per Basten JA; Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807 at 2815-2816 per Lord Brown of Eaton-under-Heywood; May v Christodoulou (2011) 80 NSWLR 462 at 481 [111] per Sackville AJA. 57Obviously these factors are not to be considered in isolation. One or more factors may feature more prominently than others in the Court's consideration, however it is necessary to consider the whole circumstances of the case. Funding and Cause of the Litigation 58It is common ground that Talent2 funded the defendant's participation in the litigation. The defendant's advice to Talent2 on 23 July 2012 that he could not contribute financially to defending any litigation was at a time when it was anticipated that both Talent2 and the defendant would be defendants in the proposed proceedings. The defendant was cross-examined about his evidence that he was not provided with an opportunity to comment upon the strategy in the litigation. His evidence was that he had not seen certain correspondence prior to preparing his affidavit evidence. He accepted that his recollection in this regard was incorrect (tr 14). He also accepted that his affidavit evidence that he was not given strategic advice was also "not right" (tr 15). He expressed the opinion that he felt that he was given an overview of the proceedings but that he did not feel he was giving "instruction" (tr 15-16). However he accepted that he was given ample opportunity to comment, for instance, on the proposed undertakings (tr 18). 59HRX initially threatened that it would commence proceedings against Talent2. It was not possible for Talent2 to ascertain the nature of the real issues in the proposed case to be brought against it on the one hand and against the defendant on the other until the Summons was served. However after the proceedings were commenced and notwithstanding it was not a party to it, Talent2 continued to fund the litigation until 22 August 2012 when it advised the defendant that it could no longer "support" him. 60I am satisfied that prior to the commencement of the litigation Talent2 was well aware that the defendant was not in a position to fund any litigation against him and the probability is that had Talent2 not funded the cost of the defendant's participation in the litigation, the defendant would have capitulated at the outset. Involvement in the Conduct of the Litigation 61The urgency with which the litigation was brought on and case managed to final hearing had an impact on the manner in which instructions were taken and advice was given. It was on 30 July 2012 that Ms Galbraith advised Sparke Helmore that they should deal directly with the defendant. Notwithstanding this approach, Talent2 was concerned to know the "strategy" and the consequent impact for it as it was funding the litigation. 62The steps that Talent2 took and the discussions it held with Sparke Helmore did not involve it in deciding on the way in which the litigation was to be conducted. However Talent2 was involved in order to obtain the information for it to decide whether to continue supporting and funding the defendant. When the evidence was served and the opportunity was taken to review what the defendant had done with the data on the USB drive, Talent2 concluded that it should no longer support, fund or indeed employ the defendant. 63HRX was put to the expense of bringing the proceedings that were resisted by the defendant with the assistance of Talent2. The correspondence and the email communications suggest that, although instructions were taken from the defendant in respect of his conduct, the strategy that was adopted in the litigation was significantly influenced by Talent2's willingness to remain financially involved in the litigation. Benefit Derived 64Ms Galbraith was candid in accepting that there was a commercial benefit to Talent2 in supporting the defendant in the litigation. It stood to gain by obtaining and then maintaining the defendant's employment knowing that he was an experienced employee with expertise in the Western Australian recruitment market. Talent2's involvement also enabled it to signal to HRX that it and its employees would "stand up to" litigation commenced by it. 65I am satisfied that Talent2 derived, and stood to derive, a benefit from defending and funding the litigation as it employed the defendant and wished to continue to employ him. It was only when Talent2 realised that the defendant was in breach of his obligations to HRX that it decided to withdraw from supporting and funding litigation. I am satisfied that this was not only because finances were tight, as Ms Galbraith put it, but also because there was no benefit to Talent2 in retaining the defendant as an employee in the circumstances that pertained at the meeting on 22 August 2012. Man of Straw 66There is really no issue that the defendant was not and is not in a position to pay the costs of the litigation, whether his own or that of HRX. However, as he was the defendant in the litigation he had no choice as to the identity of the parties. HRX chose to proceed against him as the only defendant and eschewed any action against Talent2. Order Against the Defendant 67HRX does not seek an order that the defendant pay its costs of the proceedings. Talent2 submitted that such an order is a pre-requisite to an order being made against it pursuant to s 98 of the Act. I disagree. In exercising its "full power" under s 98 of the Act, the Court is not so constrained. However as I have said much will depend upon the circumstances of each case. 68Although there is no application by HRX for an order against the defendant, I will consider whether, if such an application were made, HRX would be entitled to such an order. 69Talent2 submitted that the so-called "capitulation" by the defendant is only relevant on the basis that it may permit a Court to be confident that the party who was successful would inevitably have been successful had the proceedings been fully tried. The Court's confidence as to the inevitable outcome may provide an exception to the general rule that there be no order as to costs. 70It was submitted that the primary reason the defendant agreed to settle the proceedings was that he did not have the financial means to defend them and in those circumstances his capitulation does not provide a basis for the Court to be confident about the outcome of the proceedings. It was also submitted that the defendant did not consent to all the relief sought in the Amended Summons. For example, there was no order for damages, nor were declarations made as to the existence or infringement of HRX's intellectual property. The primary relief consented to by the defendant was the non-compete relief and the non-solicit relief. 71The defendant was always aware that he had taken HRX's information and had used it inconsistently with his obligations to HRX. Notwithstanding a number of enquiries made of him by Ms Galbraith and others, it was not until after the proceedings had been commenced and well into August 2012 that a more detailed analysis was made of the defendant's conduct. That is when the defendant disclosed to Talent2 the extent of the use of the information. 72I am satisfied that the defendant's decision to capitulate was made not only because he was not in a position to fund his defence, but also because he was well aware of his inappropriate use of information which was the property of HRX. I am confident that had the proceedings been determined at trial, HRX would have succeeded, in particular in relation to the aspect of non-solicitation of its customers. 73I am satisfied in the circumstances that HRX would be entitled to an order that the defendant pay HRX's costs of the proceedings. Order against Talent2 74Talent2 funded this litigation because of the benefits that would flow to it if it were successfully defended. It knew by no later than 23 July 2012 that the defendant could not afford to defend the litigation. It had employed the defendant for three months without apparently making the inquiries into his conduct that it made once the litigation was threatened. However, it knew by no later than 1 August 2012 that during his employment with HRX, the defendant had forwarded information relevant to his work with HRX to his personal email address. 75It is incumbent upon employers who effectively poach their competitors' employees to ensure that those employees are not acting in breach of their obligations to their former employers, particularly where the consequence of such breach is a benefit to the new employer. When a new employer "stands up to" and funds litigation brought by the former employer against its new employee in circumstances where there are breaches of obligations owed to the former employer, the new employer may be at risk of an order being made against it under s 98 of the Act. Of course it will depend upon the circumstances of each case. 76Notwithstanding that the defendant would have benefited personally from the successful outcome of the litigation in retaining his employment, Talent2 would also have benefited from such an outcome in keeping an experienced employee in the competitive market in Perth. I am satisfied that but for the funding by Talent2, the litigation would not have been necessary. 77The power to award costs against a non-party should be exercised sparingly. However I am satisfied that an order should be made that Talent2 pay HRX's costs of these proceedings. Order 78Talent2 is to pay HRX's costs of the proceedings, including its costs of this application. ********** Amendments 01 May 2013 - Amended paragraphs: Typographical error in Solicitors 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: 01 May 2013