Nichols v NFS Agribusiness Pty Ltd

BASTEN JA: There is a tendency for litigation to feed on itself. There are appeals for which the only commercial explanation can be a hope to recover the costs of the litigation. Where the appeal relates only to costs leave is required and this Court is generally slow to grant leave. However, there are cases where it is necessary to grant leave for the larger purpose of maintaining the proper administration of justice. This is such a case.

Where the parties resolve their differences, except as to the costs already incurred in litigation, they should usually expect that the court will not award costs. That is because the general rule applicable in civil litigation in superior courts [1] is that costs will “follow the event”. That rule is frequently paraphrased by reference to its purpose, namely that the successful party should generally recover its costs from the unsuccessful party. But where there has been no trial there is no “event” because, except in unusual cases, it is not possible to say that one party has been successful and the other unsuccessful. The orders made by consent may or may not demonstrate capitulation by the “unsuccessful” party.

In unusual cases, it may be possible to identify success which is manifest on the face of the record. However, to manufacture a dispute in order to resolve that question is to disregard the statutory obligation imposed on the parties, their legal representatives and the court to conduct civil proceedings so as to facilitate the just, quick and cheap resolution of the “real issues in the proceedings.” [2] As explained in Expense Reduction Analysts Group Pty Ltd v Armstrong Strategic Management and Marketing Pty Ltd: [3]

Although these remarks were made with respect to an error in the production of a document subject to client legal privilege, they apply equally to satellite proceedings directed only to determining responsibility for costs.

The manner in which the present proceedings were disposed of revealed a number of fundamental errors.

First, weight was given to the fact that the applicants (being the defendants in the court below) appeared to have readily capitulated, allowing orders to be made against them as sought by the initiating party, by consent. However that fact is, by itself, neutral. If one party commences litigation without making a pre-litigation demand, and allowing the other party a reasonable opportunity to respond, it cannot expect to recover the costs of obtaining orders which would not in any event have been opposed. There may be an exception in circumstances where destruction of material is reasonably feared and an ex parte injunction is deemed necessary. That step was taken in the present case, but its only purpose can have been to preserve evidence of the misuse of confidential material, in support of a claim for damages. That claim was abandoned and the justification for the ex parte injunction was thereby abandoned. Further, the terms of the injunction sought went well beyond that which was reasonably necessary even for that purpose, and required subsequent modification. As the High Court noted in International Finance Trust Co Ltd v New South Wales Crime Commission: [5]

In the present case, the definition of “confidential information” was, as was later conceded, too wide and the threat of destruction was not established. If, at that point in time, it had been necessary to determine whether one party had acted manifestly unreasonably, it may well have been the respondent.

Secondly, although it is possible to make an order for costs against one party if it can be shown that it has invited the litigation by its unreasonable behaviour, or has unreasonably pursued the litigation, such an order should only be made where that judgment is manifest by reference to known circumstances, not in dispute between the parties. If the question cannot be answered without reviewing large swathes of evidence and resolving, on a tentative basis, disputed questions of fact, the task should not be embarked upon.

Thirdly, if contrary to the views set out above, it was appropriate to investigate whether the applicants or the respondent had been unreasonable, either in their conduct prior to the proceedings, or in their conduct of the proceedings, the approach adopted was untenable. Thus, regard was had to the motives of the respondent in commencing proceedings, but no account was taken of the motives of the applicants in capitulating. Further, once it is clear that there is a real dispute as to a significant fact in issue in the proceedings, it is inappropriate to determine that matter, other than in making an interlocutory ruling, by accepting one party’s case without permitting the other party an opportunity to challenge the opposing party’s witnesses.

Once it becomes apparent that such a course is required, the hypothesis on which the examination was undertaken is negated and the inquiry should stop.

I do not disagree with the reasons of Payne JA; nevertheless, I prefer to rely upon the statement of principle set out above to avoid any reagitation of matters which should not have been agitated below.

I agree with the orders proposed by Payne JA.

MEAGHER JA: I agree with Payne JA.

PAYNE JA: Mr Nichols and two wholly owned companies, BNE Pty Ltd and Mimbe Pty Ltd, seek leave to appeal from a decision of Rein J in the Equity Division in which his Honour ordered that the applicants pay the respondent’s costs of proceedings which had been resolved without any hearing on the merits.

The respondent is a retail supplier of agricultural equipment. From April 2013, Mr Nichols was employed as a travelling salesman by the respondent, initially part time. From early 2016, Mr Nichols was employed by the respondent as a full time sales manager. He resigned on 24 December 2016. It is controversial between the parties precisely what Mr Nichols told Mr Leo Casey, the Operations Manager of the respondent, he planned to do after leaving the employ of the respondent and whether that conformed with what actually occurred.

On 24 April 2017, the respondent filed a summons and sought ex parte relief in the Equity Division being orders that the applicants deliver up to the Court any confidential documents or devices in the possession, custody or control of the applicants or their employees or agents. The respondent also sought orders that, inter alia, the applicants be restrained from deleting, removing or amending any confidential document from any device or any services. The remaining relief sought by the respondent in the summons was an account of profits and equitable damages.

On 24 April 2017, the respondent obtained orders from Slattery J, ex parte, restraining the deletion, removal or amendment of its “Confidential Information” by the applicants. “Confidential Information” was broadly defined in that order as comprising:

On 28 April 2017, Slattery J made further orders, by consent and without admissions, extending the orders made ex parte but making clear that the definition of “Plaintiff’s Confidential Information” in those orders:

On 8 May 2017, there was an inspection of the applicants’ electronic devices by officers of the respondent, its solicitor, and an independent information technology expert engaged by the respondent. Mr Nichols and the solicitor for the applicants were also present at the inspection. In his reasons, the primary judge found that at the meeting:

On 15 May 2017, Prothonotary Kenna extended the operative orders made by Slattery J on 24 April 2017, as amended on 28 April 2017.

On 29 May 2017, Registrar Walton made the following orders by consent:

These orders resolved the proceedings, save as to the question of costs. Two matters should be noted at the outset about those orders:

On 18 July 2017, Parker J ordered that the respondent’s application for costs be heard on 29 September 2017. That hearing took place before Rein J. Apparently no transcript is available. Over 200 pages of affidavit evidence (including annexures) was read by the parties on the question of costs. The applicants objected to the evidence read by the respondent and read their own affidavits only to the extent that the respondent’s affidavits were ruled to be admissible. Those objections were not ruled upon by the primary judge. There was no cross-examination of any of the deponents. Written submissions were made. Oral submissions were made, apparently for 45 minutes in total.

On 13 October 2017, the primary judge ordered that the applicants pay the respondent’s costs as agreed or assessed on the ordinary basis, including the costs of the application for costs.

The relevant principles governing an application for costs in a case which has been resolved without a hearing on the merits were summarised by McHugh J in Re Minister for Immigration and Ethnic Affairs; ex parte Lai Qin (1997) 186 CLR 622 at 624-625; [1997] HCA 6:

The principles summarised by McHugh J were not new. His Honour drew on numerous decided cases. The principles described by McHugh J in Lai Qin have been followed on many occasions since, including in this Court.

In Edwards Madigan Torzillo Briggs Pty Ltd v Gloria Stack [2003] NSWCA 302, after referring to the observations of McHugh J in Lai Qin, Davies AJA, with whom Mason P and Meagher JA agreed, observed (at [5]):

In Muhibbah Engineering (M) BHD & Anor v Trust Company Ltd & Anor [2009] NSWCA 205, although the Court was divided about the outcome, Handley AJA (with whom Young JA agreed) and Sackville AJA (who dissented) agreed about the legal test. In circumstances not dissimilar to the present the award of costs was predicated on the ability of the Court to find that one of the parties had acted unreasonably and the other reasonably.

In Shellharbour City Council v Minister for Local Government [2017] NSWCA 256, the Court (per Basten JA, Macfarlan JA and Sackville AJA) again applied the principles summarised in Lai Qin. The Court rejected the application for costs in that case. It was explained that the appellant resisted the conclusion that the parties should bear their own costs, there having been no determination on the merits, on two bases:

If both parties to a proceeding which has been settled without a hearing on the merits 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 cost of the proceedings.

In the present case his Honour’s judgment commenced by noting the applicants’ submission that he should not embark upon a determination of what would have been the outcome had the matter proceeded to a hearing, as such an approach would be contrary to Lai Qin. The primary judge, whilst having regard to Lai Qin, proceeded to read the 200 plus pages of affidavit evidence on the costs question and observed:

I have concluded that this approach is contrary to principle as explained in Lai Qin and adopted by this Court in many cases since, including Edwards Madigan Torzillo Briggs, Muhibbah Engineering and Shellharbour City Council.

Neither of the matters identified by the primary judge was capable of demonstrating that there had been a capitulation by the applicants or that, if the case had proceeded, the respondent would “almost certainly” have succeeded. Nor was either capable of demonstrating that there had been a marked difference in the reasonableness of the actions taken by the parties, so that one party should be rewarded for its reasonable actions and the other party should suffer a detriment in the form of a costs order against them.

The first matter, that documents which “belonged” to the respondent had been transferred by the applicants, was not relevant to the question of any likely success on the part of the respondent. As the primary judge correctly recognised, at [17], to determine who was correct in their assertions about whether there was any “Confidential Information” as defined forming part of the documents transferred or deleted by the applicants would require a hearing. The primary judge was not in a position to determine that question, and did not do so. The observation that Mr Nichols (and the other applicants) held documents which “belonged” to the respondent did not allow any judgment to be made about whether the respondent would likely succeed in the case if it had been tried. In the absence of a determination whether there was any “Confidential Information” as defined, the fact that documents which “belonged” to the respondent were transferred or deleted did not demonstrate anything about the reasonableness of the conduct of the respondent in the litigation or the unreasonableness of the conduct of the applicants in that litigation.

The second matter, that Mr Nichols agreed to order 1 made on 29 May 2017, also did not touch upon the question of any likely success on the part of the respondent. The extent to which the applicants had any “Confidential Information” and whether they used any “Confidential Information”, were and remain issues in dispute between the parties. Those questions were not resolved by the making of order 1. The making of order 1 did not allow any judgment to be made about whether the respondent would likely succeed in the case if it had been tried, much less did it permit any finding that the respondent had acted reasonably and the applicants had acted unreasonably.

After referring to a number of authorities, including Lai Qin, the primary judge said at [12]:

The reference to “Sackville AJA” was apparently intended to refer to the dissenting judgment of his Honour in Muhibbah Engineering. I do not consider that Sackville AJA’s decision in Muhibbah Engineering provides any support for the course adopted here. After setting out the principles being applied from Lai Qin, in Muhibbah Engineering Sackville AJA explained that:

That is, Sackville AJA was explaining that when in Lai Qin McHugh J described a case where the party seeking costs “in effect, has succeeded in obtaining the relief sought in the proceedings”, his Honour was referring to a case where one party, after litigating for some time, effectively surrenders to the other.

I respectfully disagree that the decision of Sackville AJA in Muhibbah Engineering provided authority permitting an examination of the affidavit evidence to determine whether the respondent had succeeded in obtaining a “material aspect of the relief sought”.

The primary judge held that “the handing over and deletion of documents on 8 May 2017 and the final orders on 29 May 2017 establish that [the respondent] has been successful and that is why there is no need for a hearing.”

This conclusion echoes the findings at [6] referred to at [31] above. At the risk of repetition, in the absence of any hearing on the merits and in circumstances where it was and remained controversial whether there was any “Confidential Information” as defined, transferring documents and agreeing to order 1 made on 29 May 2017 provide no basis to conclude that the applicants, after litigating for some time, had effectively surrendered to the respondent or that the respondent had acted reasonably in prosecuting the action and the applicants had acted unreasonably in defending the action.

His Honour next held:

The respondent sought to defend this finding on the basis of the decision of this Court in Ralph Lauren 57 Pty Limited v Byron Shire Council [2014] NSWCA 107 where Preston CJ of the LEC (with whom Beazley P and Ward JA agreed) said at 29:

Ralph Lauren 57 involved the discontinuance of a proceeding, to which different considerations apply: Bitannia Pty Ltd v Parkline Constructions [2009] NSWCA 32 per Basten JA at [66]-[80]. The point being made by Preston CJ of the LEC is that a settlement prior to a hearing on the merits usually results in no order as to costs. The case is not authority for the proposition that, if costs were to be awarded, the applicants’ reasons for agreeing to a permanent injunction were not relevant.

Although the primary judge made no express finding about the reasonableness of the conduct of the respondent in prosecuting the action or the unreasonableness of the applicants in defending that action, in this Court the respondent submitted that his Honour implicitly made both findings.

In paragraph [20] the primary judge concluded that the respondent did not pay “close attention” to what documents Mr Nichols was taking with him when he left the respondent’s employ and that this “can be explained on the basis of what, prima facie, was the untrue statement as to his [Nichols’] intentions”. The “prima facie” untrue statement is a reference to a conversation deposed to by Mr Leo Casey in two affidavits read by the respondent as part of the costs application. Counsel for the respondent accepted that this conversation was “not a part of the cause of action”, but submitted that it was relevant to the question of costs as demonstrating the allegedly unreasonable conduct of the applicants. The primary judge recorded that Mr Nichols did not “specifically deny” this conversation in his affidavits. It is clear, however, that Mr Nichols gave a different version of that conversation.

The finding that the statement was “prima facie” untrue should not have been made. Any finding of potentially serious misconduct, such as that Mr Nichols made an untrue statement, could only have been made after permitting cross-examination of all the witnesses, in particular Mr Casey and Mr Nichols. That exercise, permitting the cross-examination of witnesses to determine costs issues in a case determined other than on the merits, is antithetical to the principles explained in Lai Qin and adopted repeatedly by this Court since. Such a course would also be contrary to the principles in Pt 6 Div 1 of the Civil Procedure Act 2005 (NSW) which encourages the settlement of litigious disputes.

I reject the respondent’s submission that the primary judge intended a finding that “Mr Nichols’ lie, or the discovery of it, precipitated [the respondent’s] approach to the Court”. The language used in paragraph [20] of a “prima facie” untrue statement is inconsistent with such a conclusion. The evidence did not permit a finding that the statement was “prima facie” untrue, much less that it was a “lie”.

To the extent that the primary judge found that the respondent had reasonable grounds to commence and prosecute the action, that finding was made at [21]:

The finding has two aspects. The first is what appears to be a finding in the second paragraph about “the” confidential information. His Honour, however, was in no position to decide that question because it was in issue and not able to be decided on the papers. The second was the reference to the respondent’s belief that Mr Nichols had misled it about his intentions. That merely repeated the impermissible finding about the “prima facie” untrue statement which was based on an examination of the untested affidavit evidence.

In paragraph [23] the primary judge summarised the findings on this issue:

The first sentence records that the respondent’s success in obtaining the ex parte interim injunction was in effect an endeavour to prevent deletion of the material that would assist its case. The ex parte injunction, however, was only relevant to the case for equitable damages for misuse of confidential information, which was subsequently abandoned. By the time the primary judge came to deal with costs, there was no longer an issue in the proceedings about potential competition between the applicants and the respondent. Secondly, the conclusion that the material sought in the ex parte application was on its face clearly characterisable as being confidential required a consideration of underlying facts which his Honour, correctly, concluded at [17] he was not in a position to do.

The applicants require leave to appeal both because of the subject matter, costs, and also because the sum involved is less than $100,000: Supreme Court Act 1970 (NSW), s 101(2)(c) and s 101(2)(r). The errors of principle in the approach of the primary judge make this an appropriate case to grant leave to appeal.

The appeal should be allowed. This was not one of those cases where, in the language of Shellharbour, the respondent could make good its claim that, without addressing the merits, the primary judge could be satisfied that it would have succeeded in any event. It was not a case where, without addressing the merits, it was clear that the respondent had acted reasonably in commencing and prosecuting the claim and the applicants had acted unreasonably in defending the claim.

I propose the following orders: