Tipto Pty Ltd v Yuen (No 2)

1. [1]

   I gave judgment in this matter on 7 August 2015: see Tipto Pty Ltd v Yuen [2015] NSWSC 1086.

2. [2]

   I dismissed the plaintiffs’ claim and ordered the plaintiffs to pay the costs of the defendants, Mr Yuen and his company, which I called CoWealth Partners in the judgment.

3. [3]

   Because of particular features of the proceedings, I made directions that allowed the parties to make submissions concerning the basis upon which the costs payable by the plaintiffs should be assessed.

4. [4]

   The defendants delivered written submissions dated 21 August 2015, and the plaintiffs responded on 4 September 2015.

5. [5]

   This judgment deals with the basis upon which the plaintiffs should be ordered to pay the defendants’ costs.

Legal principles

1. [6]

   The defendants invited me to accept the following statement of the legal principles applicable to the determination of the costs of proceedings given by Ward J (as her Honour then was) in Nu Line Construction Group Pty Ltd v Fowler (aka Grippaudo) [2012] NSWSC 816, and I gratefully do so. The reversal of her Honour’s decision on appeal is irrelevant to the validity of her statement of principle: see Nu Line Construction Group Pty Ltd v Fowler (No 2) [2014] NSWCA 188. I note the observation made by Basten JA, with whom Barrett JA and Young AJA agreed, at [20], about the terms of the costs order that Ward J made. I will return to this issue below. Her Honour said:

2. [7]

   I would add, as it is relevant to the present case, that for the conduct of the unsuccessful party to be relevant to the issue of whether an order for indemnity costs should be awarded, the impugned conduct must be connected with the litigation itself, as opposed to the subject matter of the litigation, or the cause of the litigation: Mead v Watson [2005] NSWCA 133; 23 ACLC 718 at [9] – [10].

Factual background

1. [8]

   Mr Yuen ceased his employment by the first plaintiff on 28 March 2014.

2. [9]

   It is important to have regard to the relationship between the three plaintiffs, and the contractual obligations and working relationship between Mr Yuen and those three companies. It will be sufficient to note the allegations made in the plaintiffs’ statement of claim on these matters. The first plaintiff was the party to the contract of employment into which Mr Yuen entered. The first plaintiff was the trustee of a service trust through which the second and third plaintiffs, which operated businesses, engaged staff. The second plaintiff was a corporate representative of a company called Premium Wealth Management Ltd, which was the holder of an Australian Financial Services Licence. The second plaintiff provided financial planning services to clients. The third plaintiff was the holder of an Australian Financial Services Licence, and engaged in the business of distributing in Australia and New Zealand four Asia-specialist managed funds to retail investors through a network of established clients and referrers. It is not necessary to be precise, but as was pleaded in the statement of claim (at pars 12, 13, 16 and 21) from 1 July 2013, the first plaintiff provided Mr Yuen’s services to the second plaintiff for about two thirds of his working time, and one third to the third plaintiff. The second and third plaintiffs provided Mr Yuen’s remuneration in proportion to the time that he devoted to their businesses.

3. [10]

   As appears from the principal judgment, the structure of Mr Yuen’s legal arrangements with the plaintiffs was decisive to the primary question of whether the plaintiffs were entitled to the injunction that they sought based upon clause 30.1(d) of the employment agreement, as that agreement literally only prohibited Mr Yuen from competing with the first plaintiff.

4. [11]

   Mr Yuen commenced his new financial planning business, through the second defendant, CoWealth Partners, in April 2014.

5. [12]

   The plaintiffs became aware of CoWealth Partners’ business by no later than on or about 27 May 2014, after Mr Jonathan Wu received a notification via the social media service LinkedIn.

6. [13]

   The plaintiffs’ solicitors wrote a letter of demand to Mr Yuen on 20 June 2014. I agree generally with the description of this letter made by the defendants in their costs submissions. It contained a substantial number of allegations expressed in menacing terms; including that the defendants had engaged in misleading and deceptive conduct, was in contravention of s 183 of the Corporations Act 2001 (Cth), and of various breaches of confidence. The letter mentioned that the penalty for contravening the Corporations Act was $200,000. Those allegations were made notwithstanding that the plaintiffs have not subsequently pursued any claim for misleading and deceptive conduct or breach of the Corporations Act.

7. [14]

   The plaintiff circulated the letter to a number of representatives of the BT Financial Group, who were not concerned in the alleged conduct by the defendants in any way. I accept the defendants’ submission that sending a copy of the letter to these people could only have been calculated to intimidate and unnecessarily embarrass Mr Yuen, who was in the course of trying to start his own financial planning business.

8. [15]

   Mr Yuen immediately attempted to address the concerns raised in the 20 June 2014 letter by removing from the CoWealth Partners website the material being the subject of the complaint (even though he rightly believed that it was not confidential information), and he removed the whole of the profile that included the information complained of. Mr Yuen also went through his list of connections on LinkedIn and disconnected with the persons who were clients of the second plaintiff.

9. [16]

   The plaintiffs’ solicitors wrote a further letter on 1 July 2014, in which they made a number of baseless threats to Mr Yuen, and attached a draft deed of acknowledgement and undertaking. The purpose of the acknowledgements was stated to be “to recognise your obvious breaches, reaffirm your obligations to [the second plaintiff] and acknowledge the affects that your breaches have had on our client’s business”. The letter threatened that, if Mr Yuen did not agree to sign the deed, proceedings would be commenced for the damage the plaintiffs had suffered. It should be borne in mind that the plaintiffs did not ultimately make any claim for damages against the defendants, save for a misconceived claim for a trivial amount of about $2,000.

10. [17]

    The draft deed of acknowledgement and undertaking contained terms whereby Mr Yuen admitted that he had breached the terms of his employment agreement in relation to misuse of confidential information; that he had engaged in misleading and deceptive conduct; that he had breached s 183 of the Corporations Act; and that he was liable to a civil penalty under s 1317E of the Corporations Act. It required Mr Yuen to acknowledge that he was in breach of clause 30 of his employment agreement, and that the breaches had caused the second plaintiff to suffer loss and damage. It contained a pre-estimate of the damage in the sum of $100,000. It also contained extensive undertakings in relation to the use of the second plaintiff’s confidential information, and competing with the business of the second plaintiff. It contained an undertaking that if, in the future, Mr Yuen was found to be liable for any breach of the undertakings contained in the deed, he would forthwith be liable to pay to the second plaintiff the $100,000 estimate of loss contained in the deed. It required Mr Yuen to pay all of the costs incurred by the second plaintiff up to the date of the deed.

11. [18]

    No person in Mr Yuen’s position in his right mind would have agreed to sign the deed, and he rightly refused to do so.

12. [19]

    Mr Yuen sent a letter to the plaintiffs’ solicitors on 7 July 2014, in which he set out his response to the claims made on behalf of the plaintiffs. Although written in lay terms, the letter contained reasonable explanations as to why the defendants were not liable to the plaintiffs as claimed. Mr Yuen added the following offer:

13. [20]

    The operative part of this offer is in par (a), in which Mr Yuen offered to undertake not to encourage or solicit the clients of the plaintiffs to do business with the defendants, or to disparage the plaintiffs. He would also not use the plaintiffs’ confidential information. Mr Yuen did not make any offer concerning competition with the plaintiffs for any period.

14. [21]

    The defendants’ solicitors first became involved in the dispute when, on 14 July 2014, they wrote to the solicitors for the plaintiffs to advise that they were in the process of reviewing the material provided to them, and said that they anticipated that they would be in a position to provide a response to the allegations set out in the 20 June 2014 letter within seven days.

15. [22]

    The plaintiffs’ solicitors responded on 15 July 2014, by asserting that Mr Yuen had agreed to sign the deed, after certain agreed amendments had been made, and gave the defendants’ solicitors until 5 PM that day to return the signed deed, failing which the plaintiffs would approach the court for an injunction to restrain further breach by the defendants and damages.

16. [23]

    Further correspondence then took place between the solicitors in which the plaintiffs pressed for an immediate response, and the defendants sought time to deal with the allegations.

17. [24]

    The defendants’ solicitors sent a substantive response to the plaintiffs’ solicitors on 17 July 2014, in which they provided explanations as to why the plaintiffs’ claims would fail. Those explanations are substantially in accordance with the findings made in the principal judgment in these proceedings. The letter reminded the plaintiffs of the steps that Mr Yuen had taken voluntarily to resolve the complaints made by the plaintiffs.

18. [25]

    The plaintiffs’ solicitors replied on 24 July 2014 by refuting the arguments made on behalf of the defendants, and demanded undertakings from Mr Yuen by 5 PM the next day. The undertakings sought included an undertaking that Mr Yuen would not, before 28 March 2016, directly or indirectly carry on or be engaged or interested in any business which competes with the business of the second plaintiff in the state of the New South Wales, including without limitation in the CoWealth Partners business, except in the capacity solely as an employee. By the demand for this undertaking, the plaintiffs sought to prevent the defendants competing entirely with the second defendant for the period of the restraint in clause 30.1(d). The plaintiffs ultimately failed in that claim in the proceedings.

19. [26]

    The plaintiffs’ solicitors delivered a draft summons to the defendants’ solicitors on 28 July 2014, with the advice that the summons would be filed the next day before the duty judge, unless a resolution could be reached that afternoon.

20. [27]

    The defendants’ solicitors again responded on 28 July 2014, with explanations as to why Mr Yuen was not liable to the plaintiffs, but added that Mr Yuen offered, without admission of liability, that he was willing to enter into a suitably worded deed with the plaintiffs that included the following undertakings; that Mr Yuen would undertake not to:

21. [28]

    The offer was made on the condition that the plaintiffs would not make any disparaging comments concerning the defendants, and that within seven days of the deed of settlement being executed, the second plaintiff would send to all of the third parties to which the 20 June 2014 letter had been sent, a formal retraction.

22. [29]

    This offer was also restricted to refraining Mr Yuen from contacting the plaintiffs’ clients for a period of one year from the termination of employment; from inducing the plaintiffs’ employees for the same period from terminating their employment; and a limited undertaking not to publish confidential information of the plaintiffs. It did not include an offer restricting the defendants from competing with the plaintiffs.

23. [30]

    The plaintiffs filed a summons on 29 July 2014. They sought the following primary relief:

24. [31]

    The plaintiffs’ responded to the defendants’ solicitors’ 28 July 2014 offer by causing their solicitors to deliver to the defendants’ solicitors a letter on 6 August 2014, which purported to be an offer of compromise in accordance with UCPR r 20.26. It is not material, but the offer did not comply with the rule, because it required Mr Yuen to pay the plaintiffs’ costs.

25. [32]

    The terms of this offer were considerably narrower than the relief sought by the plaintiffs in their summons. The plaintiffs stated that they would accept an order restraining Mr Yuen up to 28 March 2016 from contacting, inducing, encouraging or soliciting any of the clients of the plaintiffs in the terms of clause 30.1(c) of the employment agreement; or disparaging the plaintiffs or the services they provide. They would also accept an order requiring Mr Yuen to disconnect with any client that used the services of the plaintiffs on LinkedIn. Finally, they would accept orders that enforced the confidentiality undertakings given by Mr Yuen in the confidentiality agreement that he signed.

26. [33]

    The orders that the plaintiffs offered to accept were therefore substantially in accordance with the relief sought in pars 1, 2, 3 and 5 of the summons. They did not seek orders restraining competition by the defendants in terms of orders 4 and 6.

27. [34]

    On 11 August 2014, about one month after the plaintiffs filed their summons, and one month before the statement of claim was filed, the defendants’ solicitors sent a formal Calderbank offer to the solicitors for the plaintiffs. It is appropriate that the relevant parts of the offer, which was expressed to be without prejudice save as to costs, be set out in full:

28. [35]

    It must be noted that the offer made by the defendants in the Calderbank offer was relatively narrow. Undertaking (a) was confined to communications with advisers and employees of businesses with whom the second and third plaintiffs dealt. Undertaking (b) concerned communications with any persons concerning the second plaintiff. Undertaking (c) concerned publication of information about the funds distributed by the third defendant. Undertaking (d) concerned the publication of information about the second defendant. Undertaking (e) and (f) involved assurances that Mr Yuen did not have information from specified databases of the second and third plaintiffs. Undertaking (g) was an undertaking not to distribute any fund on behalf of an investment manager. This last undertaking may have confined the defendants from competing with the third plaintiff, whose business involved the distribution of funds.

29. [36]

    It is difficult to relate any of these offers to the claims made by the plaintiffs in their summons. It is not clear what the effect of the offers would have been, if accepted by the plaintiffs. The defendants did not include in their letter any explanation as to why these particular undertakings ought to be accepted by the plaintiffs.

30. [37]

    The defendants also offered that Mr Yuen would, on the hearing of the forthcoming application by the plaintiffs for interlocutory relief, offer a series of undertakings to the court, and that those undertakings would be given regardless of whether the offer set out above was accepted by the plaintiffs. In due course, on 12 August 2014, Mr Yuen gave those undertakings to the court, following the non-acceptance of the offer by the plaintiffs. In the principal judgment at [12], I described those undertakings as “wide ranging”. In substance, Mr Yuen undertook that the defendants would not act for any new clients without first complying with a protocol that would prevent them from providing services to any existing client of the plaintiffs.

31. [38]

    As I have noted above, Mr Yuen’s employment by the first plaintiff terminated on 28 March 2014. The contractual restraints of trade relied upon by the plaintiffs contained in clause 30.1 of the employment agreement were for a period of two years after the end of his employment. The offer made by the defendants on 11 August 2014 was for the making of undertakings by Mr Yuen that would subsist for half of the period provided for in the employment agreement.

32. [39]

    The defendants did not make any offer in relation to the non-disclosure of confidential information, but they did offer that Mr Yuen would undertake that he did not have in his possession any documents or electronic files of the description in subpars 1 (e) and (f).

33. [40]

    The plaintiffs served a further offer of compromise on the defendants on 4 May 2015. The offer was open for a period of four days. It only sought undertakings from the defendants that would have effect up to 28 September 2014. That must be a typographical error, as the offer was made on 4 May 2015. The restraints that the plaintiffs offered to accept appear to have been a revised amalgam of a number of the undertakings that the defendants offered, including their interlocutory undertakings, in their Calderbank offer.

34. [41]

    It may be observed that it is difficult, if not impossible, to discern the rationale behind any of the offers made by both the plaintiffs and the defendants in the course of these negotiations. They are only indirectly related to the terms of the contract of employment and the confidentiality agreement, and the relief sought by the plaintiffs in their summons. None of the parties explained the rationale for their offers.

35. [42]

    The plaintiffs filed a statement of claim on 11 September 2014. Notwithstanding that the plaintiffs had made offers to the defendants that suggested that they would be content with substantially less relief than they had originally sought in the summons, when the offers were not accepted by the defendants, the plaintiffs plunged on with their original claim. I will not in these reasons repeat the lengthy observations that I have made in the principal judgment concerning the claims made by the plaintiffs in their statement of claim.

36. [43]

    It is sufficient to note that the plaintiffs alleged a substantial number of breaches of duty of fidelity and good faith, and breaches of restraints of trade, against the defendants in circumstances where they sought no relief in respect of the breaches. The evidence led by the plaintiffs could only, in any event, have established a small number of trivial breaches.

37. [44]

    The plaintiffs pursued a fraud claim against the defendants that was entirely misconceived.

38. [45]

    They also pursued a trivial claim for misuse of confidential information, in circumstances where they were forced to admit that two of the three pieces of alleged confidential information were in the public domain, and I found that the third piece was not in any event confidential.

39. [46]

    The only substantial claim that the plaintiffs had depended upon was the proper construction of clause 30.1 of Mr Yuen’s employment agreement in relation to the effect of a number of restraints of trade. The plaintiffs failed on that aspect of their case, but it was the only aspect that was reasonably arguable.

40. [47]

    The hearing of these proceedings lasted seven days. The defendants invited me to find that, if the plaintiffs had only pursued the aspect of their claim that was reasonably arguable, which they themselves described as being the “heart” of the case, or the “central issue”, the hearing would only have lasted one day. I do not quite agree with the defendants’ submission. In my view it is probable that the plaintiffs’ case, if so confined, would have lasted more than one day, and an appropriate estimate would be two days.

Consideration

1. [48]

   In my view the manner in which the plaintiffs, through their solicitors, initially made demands on Mr Yuen was so menacing, misconceived and unreasonable that it was clearly unwarranted and inappropriate. That is particularly so in relation to the manner in which the plaintiffs made very serious threats against Mr Yuen concerning the alleged unlawfulness of his conduct; in circumstances where the threats were baseless and never carried out; and where they were published to third parties with whom Mr Yuen may have wished to deal.

2. [49]

   However, it is clear that costs orders are compensatory and not punitive. I do not accept that this conduct was sufficiently connected with the litigation itself to provide a sound basis for an order for indemnity costs against the plaintiffs.

3. [50]

   I do not accept that the defendants have made out a case that they are entitled to an order that the plaintiffs pay the whole of their costs on the indemnity basis for the whole of the proceedings.

4. [51]

   I accept that the defendants attempted, by the various responses that they made to the plaintiffs’ claims, to compromise those claims on a reasonable basis. Mr Yuen responded to the original claims by going further than he was probably required to by removing from his LinkedIn page, and CoWealth Partners’ website, information and other material that may have been complained of by the plaintiffs. He made a number of offers which, given the outcome of the litigation, were probably reasonable and would, if accepted, have given the plaintiffs greater relief than they ultimately achieved. However, I do not accept that the plaintiffs’ conduct generally in failing to accept those offers warrants an order for indemnity costs.

5. [52]

   In particular, I do not accept that the defendants have established that they are entitled to indemnity costs as a consequence of the plaintiffs’ failure to accept the formal Calderbank offer made on their behalf on 11 August 2014.

6. [53]

   The plaintiffs had a clearly arguable case that the effect of clause 30.1(d) of the employment agreement was to prohibit the defendants from competing with any of the plaintiffs for a period of two years after the termination of Mr Yuen’s employment. They also had a reasonably arguable case that the evidence concerning Mr Yuen’s LinkedIn page demonstrated contraventions of the prohibition clause 30.1(c) about Mr Yuen contacting clients and distributors.

7. [54]

   It is clear that, as the plaintiffs’ claims were dismissed, they would have fared better in the litigation if they had accepted the Calderbank offer, than the result they have actually achieved. However, the question is whether the defendants have demonstrated that it was unreasonable for the plaintiffs to have rejected that offer.

8. [55]

   I have set out the terms of the Calderbank offer above, and offered some observations about the apparent absence of a rationale for the terms of the offer. It is difficult to relate the offer to the relief sought by the plaintiffs in their summons. It is not clear that the plaintiffs would have gained any significant benefits, if they had accepted the offer. The defendants did not explain why the plaintiffs ought to have accepted the offer. Most significantly, the offer did not deal with the issue of restraint from competition, which in my view was the principal relief sought by the plaintiffs. In saying that, I have not ignored that the plaintiffs themselves, by their own offers, offered compromises that did not involve a restraint of competition.

9. [56]

   I am simply not satisfied on the evidence that it was unreasonable for the plaintiffs not to accept the defendants’ Calderbank offer.

10. [57]

    I do not think, however, that this is a case that warrants the defendants being limited to an order that the plaintiffs pay the costs on the ordinary basis.

11. [58]

    As I have explained in detail in the primary judgment, and outlined above, the plaintiffs alleged a substantial number of breaches of contract against the defendants in respect of which they sought no relief. They justified maintaining the claims on the basis that a large number of petty breaches of the employment agreement justified the court in concluding that the defendants had a propensity to breach their obligations. I rejected that argument. The plaintiffs pursued a fraud claim which was misconceived, which even they did not understand. The plaintiffs’ claim for disclosure of confidential information was also baseless in respect of two of three pieces of information. The plaintiffs persisted long after it was made clear to them by the defendants’ defence that their claim in relation to the two pieces of information was hopeless. The claim in respect of the one piece of information that was not hopeless was trivial, and in any event not sustained.

12. [59]

    I am satisfied that the way in which the plaintiffs conducted the litigation from the filing of the summons involved a level of misconduct which justifies a more onerous costs order than the usual order. It is not simply a matter of misconduct, as I am satisfied that the plaintiffs’ misconduct prolonged the hearing, and therefore increased the costs of preparation in a manner that was entirely unnecessary.

13. [60]

    I have decided that the appropriate course is to make a costs order that is designed to ensure that the defendants receive a higher proportion of their reasonable costs and disbursements on a solicitor and client basis than they would receive from an assessment of their costs on the ordinary basis. Having regard to what Basten JA said in Nu Line Construction Group at [20], I have concluded that the costs order should not be framed in terms of the defendants’ solicitor/client costs, but in terms of their reasonable solicitor/client costs. The intent is that any such costs that were unreasonably incurred should be ignored. Doing the best I can, having regard to my understanding of the manner in which this litigation has been conducted, I make the following orders:

    1. (1)

       Save as to costs already the subject of orders made in these proceedings, the plaintiffs are to pay 85% of the defendants’ solicitor/client costs of the proceedings, provided that those costs were reasonably incurred, including, for the removal of doubt, any costs that have been hitherto reserved.

    2. (2)

       All exhibits and documents produced on subpoena or notice to produce may be returned forthwith in accordance with the rules of Court.