Zaki Property Pty Ltd v ACE Australian Construction Experts Pty Ltd

By notice of motion filed on 8 June 2018, the applicant, TSA Management Pty Ltd (TSA) applied for an order against the respondent, ACE Australian Construction Experts Pty Ltd (ACE) for the payment of its reasonable expenses incurred in complying with a subpoena to produce filed on 13 February 2018, such amount to be fixed in the sum of $12,372.80.

The principal proceedings in respect of which ACE served the subpoena on TSA have now been discontinued.

The schedule to the subpoena sought the following categories of documents:

It will be noted that each of the categories other than in pars 3 to 5 sought various descriptions of correspondence between TSA and various named correspondents. Although referring to different categories of documents, pars 3 to 5 referred to specific categories. Only categories 6 and 7 sought correspondence "concerning" a particular issue, being damage to the correspondents’ works on the property the subject of the development.

On their face, the 12 categories do not look complex. However, in each case where correspondence is sought, "all correspondence" is required. Some of the categories, such as invoices, tenders, and the contract, may have been kept in special files or electronically. In respect of the other categories, the exercise of compiling the documents would depend upon TSA's filing system. One common way that the task required of TSA could be complicated arises from the fact that documents sent to or received by the identified parties were required to be produced. Such documents are not always identified with specificity in covering communications, assuming covering communications were used. Sometimes documents are filed separately from covering communications. The number of documents falling within the categories may have been related to the length of the period that TSA was involved in the development. In so far as the categories sought emails, those emails may have proliferated within TSA's electronic files, particularly in so far as the "cc" and "reply all" functions were used by the correspondents. It may be that emails falling within the categories could have been identified by TSA by conducting electronic searches. However, emails identified in that way may have been embedded in chains of emails that fell outside the categories. It would not be realistic to expect to be able to forecast reliably the nature or the cost of the exercise that TSA would have to carry out to respond to the subpoena simply by considering the terms in which the categories were identified.

The subpoena required the documents to be produced to the Court on 28 February 2018.

TSA's solicitors responded to the receipt of the subpoena on 26 February 2018 by sending a letter to ACE's solicitors.

The letter said that TSA would collate and produce the documents sought notwithstanding an allegation that the subpoena had been served late and without any conduct money being tendered.

The letter added:

ACE's solicitors responded on what appears to be 27 February 2018 relevantly as follows:

TSA produced documents in answer to the subpoena in electronic form on a hard disk. There is no issue about whether the production reasonably and adequately responded to the subpoena.

On 21 March 2018, TSA's solicitors wrote a letter to ACE's solicitors in which they sought a total of $12,372.80 as the cost to TSA of answering the subpoena. That claim represented the costs of Mr Ross Birch, a project director employed by TSA, calculated at 31 hours at $250 per hour, giving $7750, plus Mr Luke Gunson, another project director employed by TSA, of 24 hours at $140 per hour, giving $3360, plus a 1 TB hard disk at a cost of $138. The total was $11,248, to which GST of $1124.80 was added, giving a total claim of $12,372.80.

The letter advised that both Mr Birch and Mr Gunson were taken from projects they were working on to undertake the task of answering the subpoena.

The solicitors asked that ACE's instructions, concerning reimbursement of the amount claimed, be obtained.

ACE's solicitors responded on 26 March 2018. They set out the amount claimed, and noted that 55 hours of work had apparently been engaged in for the purpose of producing 436 documents. The letter continued:

The substance of TSA's solicitors' 11 April 2018 reply was:

The timesheet in substance only stated the number of hours in which each of the project directors had engaged in responding to the subpoena, broken up into separate days.

Rule 33.11 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) provides:

It should be noted that sub-rule (1) refers to "loss or expense", while sub-rule (2) obliges the court to fix the "amount" or direct that it be fixed in accordance with the Court's "usual procedure in relation to costs". The Court's usual procedure in relation to costs involves the determination of legal costs and disbursements in relation to costs orders. Costs assessors have expertise in determining reasonableness of those types of expenses, although usually disbursements are accepted if it was reasonable for the party entitled to costs to incur them. These procedures may be conveniently implemented if the recipient of the subpoena is a solicitor, or in the particular circumstances it is convenient for the recipient of the subpoena to provide documents in bulk to its solicitor in order for the solicitor to identify the documents required to be produced in answer to the subpoena. Where, however, the recipient of the subpoena is not a lawyer, the ascertainment of the loss or expense may require an investigation that is materially different from an assessment of legal costs. Where the recipient of the subpoena's business involves the provision of services at a fee calculated on a time basis, the loss or expense may be analogous to the situation in which a lawyer has answered the subpoena, however that will not always be so. There may not be readily identifiable standards of what response or costs are reasonable.

The amount, while being important to the recipient of the subpoena, will often not be substantial relative to the potential cost of determining in a conventional way what the reasonable loss or expense is. Experience suggests that the Court is not often required to fix amounts of this nature, but the obligation does have the potential to distract the Court from more important tasks.

This is a consideration that should inform the process that the Court will adopt in resolving disputes as to what the proper amount is, and furthermore, it makes it all the more important that parties issuing subpoenas and the recipients of subpoenas cooperate to achieve the objectives of the relevant rules, which as shall be seen is to minimise the need for the Court to have to determine amounts of reasonable loss or expense incurred by complying parties.

Ordinarily, before a party who has received a subpoena may apply to the Court for an order for the costs of compliance, it is necessary that UCPR rule 42.33 be complied with. That rule provides:

ACE accepted in the present case that TSA had satisfied rule 42.33 by means of the correspondence referred to above.

At the hearing of the application, a director of TSA gave evidence that the company was the initial project manager for the Little Zac's Childcare project, which was the subject of these proceedings. He said that TSA acted as project manager from October 2015 to December 2017. Ross Birch and Luke Gunson were project managers, and three further identified employees of TSA worked on the project as assistant project directors. Two of the assistant project directors were no longer employed by TSA.

The following evidence was given by a director of TSA to justify TSA's claim for its costs of complying with the subpoena:

The only evidence relied upon by ACE was an extract from the Fair Work Commission Legal Services Award 2010, which set out minimum wages for various categories of legal clerical and administrative employees up to law clerk. The range per week was $802.50 to $1024.50. This evidence was tendered in support of ACE's claim that much of the work done in response to the subpoena could have been undertaken by junior legal clerical staff.

There are two primary constraints on the making of an order to compensate the recipient of a subpoena for complying with the order of the Court requiring compliance. The first is the requirement in UCPR rule 33.11(1) that the amount represents "any reasonable loss or expense" that is incurred. The second is the requirement in UCPR rule 42.33 that a costs order is generally not to be made unless the court is "satisfied that the parties concerned have attempted, but failed, to agree on the amount of the costs to be paid".

The former constraint is directed at the process of compliance, and the objective of the rule must be to ensure that third-party recipients of subpoenas are properly compensated for the cost of so doing, while at the same time ensuring that the obligation of a party to pay those costs does not become an excessive impediment to the achievement of the cost efficient resolution of litigious disputes.

The second constraint is directed to requiring both the party issuing the subpoena and the recipient to seriously attempt to agree the amount that represents the reasonable loss or expense of the recipient, so that the costs of resolving the amount of the cost is not excessive, and also that the Court's resources are not wasted in relatively minor but time-consuming cost assessment exercises.

With respect to the second constraint, Ward CJ in Eq said in ADM v FDGK (No 2) [2018] NSWSC 445:

A number of propositions are now uncontroversial concerning the operation of rule 33.11.

In Danieletto v Khera (1995) 35 NSWLR 684, Bryson J (as his Honour then was) said at 686 (in respect of the equivalent of rule 33.11 that previously applied in Part 37 rule 9 of the Supreme Court Rules 1970):

His Honour continued at 688:

Campbell J (as his Honour then was) adopted these statements in J Aron Corporation v Newmont Yandal Operations Pty Ltd [2004] NSWSC 996 at [22].

Earlier, Campbell J had said in Foyster v Foyster Holdings Pty Ltd (in liq) [2003] NSWSC 881:

In Deposit & Investment Co Ltd (Receivers Appointed) v Peat Marwick Mitchell & Co (1996) 39 NSWLR 267, Bainton J said at 292-293 (in relation to a firm of solicitors who had received a subpoena, and who customarily provided services to their clients on a time cost basis):

That line of reasoning is equally applicable to TSA in the present case, as there is sufficient evidence that TSA provides services to its clients on a time-cost basis at given rates for employees of particular seniority. There is also sufficient evidence that the employees involved were diverted from other fee-earning tasks in order to comply with the subpoena.

It may be rare that a moral emerges out of the resolution of a dispute. Arguably, the present is a case where it has. Parties to proceedings from time to time need to serve subpoenas on third parties. Sometimes compliance is inexpensive, but often it will cost a significant amount. That amount, even if ultimately found to be reasonable, may not be easily forecast by the issuing party's lawyers. Thus, those lawyers take a risk that their client will have to bear. On the other hand, where the third party is represented by lawyers, those lawyers take a risk on behalf of their client, if they permit their client to incur significant costs of complying with the subpoena without first ensuring that those costs will be met by the issuing party. The moral is that, except in easily predictable cases, the lawyers for both parties must be astute to communicate with the other reasonably and openly to achieve the objectives described above. First, wherever possible agreement should be reached before costs are incurred, because the incurring of costs without agreement will promote dispute. Secondly, where costs are incurred, genuine negotiation is required to ensure that the amount of compensation reflects the nature of the compliance that was reasonably necessary.

In the present case, with due respect, ACE's solicitors invited disappointment by the terms of their 27 February 2018 reply to TSA's solicitors' letter. The latter had reasonably and sensibly informed ACE of the process that TSA would adopt to comply with the subpoena. Unfortunately, the estimate turned out to be too low. That was the opportunity for ACE's solicitors to challenge the approach that TSA proposed to adopt, and either negotiate a new approach, or reduce the ambit of the subpoena. It was not helpful that ACE's solicitors only suggested an alternative basis for compliance with the subpoena, and even then without any substantiation, after TSA had incurred the costs and made the claim. The facts of this case provide a cautionary tale. The best way to resolve a dispute is to avoid it.

A likely source of difficulty in achieving the objectives outlined above was identified by Campbell J in Foyster at [16], where his Honour said: "There is no evidence whatever before me about what the issuer of the subpoena might have known or did know, about the expenses which would be involved in complying with the subpoena. The material which is called for in the subpoena is material which might, in an office with a well-organised filing system, have been very readily available."

The problem for the party issuing the subpoena will often be one of ignorance about the number of documents potentially falling within the categories in the subpoena, the ease with which the recipient will be able to identify and collate those documents within its record-keeping system, or the seniority of the officers of the recipient and the time that will be required to make judgments about, first, what documents truly fall within the categories required to be produced, and secondly, whether the recipient has good grounds for resisting the production of some or all of the documents sought. Accordingly, while on the one hand the third party recipient of the subpoena, who is placed under compulsion to answer it, should not have to bear the costs of the involuntary assistance that it is required to give in the judicial process, on the other hand there is considerable scope for parties to proceedings who must subpoena third parties to obtain necessary evidence to be visited with unexpectedly onerous obligations to pay the costs of compliance incurred by the recipients of subpoenas.

The ultimate objective of the process of determining the costs that should be paid to third-party recipients of subpoenas must therefore be to achieve the optimal balance between the production of documents necessary for the party's case, while at the same time facilitating transparency as to the ultimate cost, and then encouraging the party and the recipient to agree upon the proper compensation, without drawing the Court into the need to resolve disputes unnecessarily.

In practical terms, the issues that arise in determining the reasonableness of the loss or expense incurred by the recipient of the subpoena will often be related to the ability of those parties to comply with the obligation in UCPR rule 42.33 to genuinely attempt to agree on the amount of the costs to be paid. For any given subpoena, there may be a reasonable amount of loss or expense that will be caused by compliance, and unless the process of compliance with the subpoena is obviously a simple administrative task, then the amount may not reasonably be expected by the party issuing the subpoena. Where the amount claimed is unexpectedly large, the likelihood that any attempt at agreement will be unsuccessful is reduced.

In many cases the achievement of the objectives of the rules will depend upon the reasonableness with which the party issuing the subpoena formulates the categories of documents sought, in relation to the likely ease of the documents being identified and collated and produced to the Court. Equally, the achievement of the objectives is likely to depend in cases where the identification and collation of the documents is not straightforward, on the recipient of the subpoena not only adopting the most cost-effective process of complying with the subpoena that is practicable, but also in appropriate cases informing the party issuing the subpoena before the process of answering it as to whether a particular factor is likely to increase the expense of compliance in a manner unlikely to be anticipated by the issuing party.

The issue of whether the loss or expense caused by compliance is reasonable or not may not depend solely on the objectively determined reasonable costs of compliance, after the exercise has been completed. It may also depend upon the nature and effectiveness of the communications between the issuing party and the recipient designed to facilitate the production of necessary documents in a cost-effective way. Both the issuing party and the recipient of the subpoena will usually be well advised to communicate with each other so that unexpected costs are not incurred in ignorance of what will be entailed. The requirement for reasonableness in UCPR rule 33.11 will not necessarily be confined to the process of complying with the subpoena, but may extend to the process whereby the issuing and the receiving parties communicate to facilitate the issuing party being able to decide what production should be compelled with realistic information concerning the likely cost of compliance.

I respectfully agree with the following observations made by Slattery J in Gooley v Breda Pty Ltd [2017] NSWSC 1505:

These considerations are relevant in the present case because, by means of TSA's solicitors' 26 February 2018 letter that has been extracted above, they warned AEC's solicitors that it was expected that a project director would be required at a rate of $250 per hour plus GST to spend three days in complying with the subpoena. The estimated cost was $6000 plus GST.

As it has happened, this forecast was an underestimate, in that the project director referred to spent 31 hours, giving a total of $7750. In addition, 24 hours work by a more junior project director, charging $140 per hour, was required, giving an additional cost of $3360.

Each case will, of course, depend upon its own facts, but ordinarily an estimate such as that given in TSA's solicitors' letter would not be regarded as a quotation, to which the party receiving the subpoena should be held. It could only be regarded as a broad estimation, and would depend upon the detail of the task necessary to comply properly with the subpoena.

There may be cases where, during the course of answering the subpoena, it becomes sufficiently obvious that any estimate given will be entirely inadequate, that it may be incumbent on the recipient of the subpoena, acting reasonably, to advise the issuing party that compliance will be much more costly than anticipated.

In the present case, however, ACE's solicitors responded to the information provided by TSA by simply saying that TSA could reach an agreement with ACE about any cost of production, or make an application to the Court. ACE would leave it to the Court to decide what is reasonable.

ACE did not respond before TSA had incurred the costs of compliance, by taking the stance that it took subsequently, that only three supervisory hours by a project director would be necessary, together with seven hours of clerical time at $70 per hour.

The reality of the matter is that the Court does not have detailed evidence from TSA to make good the proposition that it was necessary for two project directors to personally implement the task of reviewing TSA's files in order to comply with ACE's subpoena. On the other hand, it would not be conducive to the interests of justice for the Court to encourage a process whereby the recipients of subpoenas are required to provide comprehensive proof of the justification for the process adopted in complying with subpoenas, which will generally be an entirely collateral issue to those that are required to be resolved to dispose of the principal proceedings.

TSA's director gave unchallenged evidence that the two project directors were required to properly examine TSA's files and other records to comply with the subpoena, that their charge out rates were as stated, and that they were required to spend the time recorded in the timesheet. As TSA was not sure that it would be compensated for its costs before either ACE agreed to pay them, or the Court made an order to that effect, it is probable that TSA chose what it considered to be a cost-effective method for complying with the subpoena. TSA's judgment may have been wrong, but the issue is how that judgment could be effectively challenged. As such a challenge would probably require a relatively comprehensive understanding of TSA's record keeping arrangements, and the means available to it to retrieve information, resolving that issue could be a substantial forensic challenge. It is true that TSA has the technical burden to establish the reasonable loss or expense that it has incurred, but it would be a counter-productive policy for the Court to require parties who have complied with subpoenas to tender substantial evidence as a matter of course. This is where the communications between TSA and ACE before TSA began to comply with the subpoena are crucial, as what is reasonable compliance may be influenced by the warning given by the complying party to the issuing party as to what the former believes will be required in order to comply with the subpoena properly.

An aspect of the problem may be demonstrated by an exchange between the Court and the legal representative for ACE during submissions on the notice of motion. The Court raised the problem, which seems to be a ubiquitous feature of modernity, where emails proliferate by reason of the unrestrained use of the “cc” and “reply all” functions. It can become a difficult task to review all such emails to determine relevance and whether they are liable to be produced.

The legal representative's reply was to suggest that the email database could readily be searched by an appropriate word search. As there was no suggestion that any relevant emails were confidential, the legal representative suggested that the costs could have been reduced by simply producing all emails identified by the search in bulk. However, while as a matter of fact that proposition may be true, TSA was still entitled to distinguish between emails required by the subpoena to be produced, and those which were not. Furthermore, ACE may have been entitled to complain if production by TSA took the form of burying the emails required to be produced by the subpoena in a mass of emails that do not respond to the subpoena categories.

In a small way this issue serves to demonstrate the uncertainty faced by the party issuing the subpoena as to what will be required in order to comply with it, the forensic challenges involved in determining after the event what is or is not a reasonable form of compliance, and the desirability of the problem being resolved before costs have been incurred.

In the present case, as ACE did not challenge in advance the procedure that it was advised TSA proposed to adopt in complying with the subpoena, in my view it is proper for the Court to accept the implication in the evidence tendered in support of TSA's claim that it was reasonably necessary for TSA to have qualified project directors to review all of its files in the manner set out in the evidence in order to comply with the subpoena.

Essentially, the appropriate method to be adopted for proper compliance by the recipient of the subpoena is a matter that should be dealt with between the issuing and the receiving party before and during the process of compliance, rather than it be left open to the recipient on the basis that it will be treated as a justiciable matter that will burden the Court to enquire into and determine upon the basis of evidence what the reasonable process for compliance in fact was.

If the outcome of the issuing and the receiving parties’ communications concerning the appropriate process for compliance with the subpoena generates disagreement, then the appropriate course is for that disagreement to be resolved by application to the Court before any dispute as to incurred costs crystallises, with the result that the Court is left with an unnecessary collateral dispute that will often be burdensome to resolve.

I have mentioned above that ACE has not submitted that the Court is precluded from making an order for reasonable loss or expense in favour of TSA in the present case because of non-compliance with UCPR rule 42.33.

It is essential for both third-party recipients of subpoenas, and the issuing parties, to appreciate that, in the usual case, the Court will be precluded from making an order under UCPR rule 33.11, if the court is not satisfied that the parties concerned have attempted, but failed, to agree on the amount to be paid: see Franklins Pty Ltd V Endeavour Holdings Pty Ltd [2013] NSWSC 1204 per Pembroke J at [5]-[6], and ADM v FDGK (No 2) at [68]. As Pembroke J said in the former case at [5]: "There must be a genuine bid to arrive at a figure that is satisfactory to both parties. The requirement of Rule 42.33 is not a mere formality. It is not satisfied when the party seeking to recover costs has not even waited for a response. Nor is it satisfied simply because it is suspected that the claim is so high that it is likely to be rejected. The court should not be troubled when the applicants have failed to wait…"

As Ward CJ in Eq noted at [77] in the latter case, in a case where the issuing party and the recipient had not attempted, but failed to agree on the amount of costs to be paid, before the notice of motion seeking an order for those costs had been filed: "However, R 42.33 does not specify that the attempt at agreement on the amount of costs must take place prior to the filing of an application for those costs (as opposed to the attempt taking place prior to any order being made)". This observation reflects the fact that UCPR rule 42.33 does not require the attempt to agree upon the amount of the costs to have been made, and failed, before the notice of motion seeking an order for payment of those costs has been filed. Rather, in its express terms, the rule only prevents the Court from making the order if the Court is not satisfied that there has been a failed attempt to agree upon the costs before the order is made.

While I respectfully agree with her Honour as to the meaning and effect of the rule, it is obviously inherent in all of the observations made by her Honour that, as a matter of proper practice, the issuing party and the recipient of the subpoena should always attempt to reach agreement before the recipient issues a notice of motion seeking an order from the Court.

The reason for that proposition is obvious, as the objective of the rule will not be achieved in an optimal fashion if the parties risk a waste of costs by not attempting to reach agreement before the notice of motion is filed, and also risk the Court not being prepared to make the order because it is not satisfied that the attempt to agree the costs has been genuinely and adequately made.

It must be borne in mind that what is required is that the parties genuinely attempt to agree the actual proper reasonable amount for the recipient of the subpoena's reasonable loss or expense in complying with the subpoena. Any party who treats the process as an exercise in what is colloquially known as "horse trading", will not be conforming with the obligation imposed upon it by the Rules: ADM v FDGK (No 2) at [82].

Relevantly to the present case, where the party issuing the subpoena makes reasonable requests for an explanation as to how and why costs have been incurred by the recipient of the subpoena, reasonable information should be supplied before any notice of motion seeking an order is filed: see ADM v FDGK (No 2) at [81]. It is likely to be the case that WIP reports in conventional form, which essentially identify the person doing the work, the cost, and the time will not be adequate without further elaboration: see ADM v FDGK (No 2) at [81]

In cases where the recipient of the subpoena does not take the time and trouble to fully comply with its obligation to explain the basis of its claim before it files its notice of motion, that party takes the risk that even if it escapes the rejection of its claim pursuant to rule 42.33, the Court may apply a broad brush approach "in the absence of sufficient information to make a more detailed assessment" of the appropriate amount to be allowed to the applicant for costs: see ADM V FDGK (No 2) at [82].

In the present case, TSA did not in its correspondence with ACE before it filed its notice of motion, give any detailed explanation of the true meaning of the WIP report that, it provided to ACE. Nor has any transparent explanation been provided in the evidence in support of the notice of motion.

On the other hand, in ACE's solicitors' 27 March 2018 letter to TSA's solicitors, ACE advised in its response that TSA should only be entitled to costs of $965.80, but it also invited TSA to write to justify why a larger sum than what had been offered was reasonable.

TSA responded on 11 April 2018, by its solicitors' letter as extracted above. TSA's timesheet was included with that letter. It may be that the timesheet was not very informative, but the Court must infer on the evidence that there was no further response on behalf of ACE, or any request for explanation of the timesheet.

As ACE did not increase its offer, which in my view was clearly inadequate and unsubstantiated, and as it did not seek any further explanation of TSA's claim, or even at the hearing challenge the factual basis of TSA's claim, I have concluded that it is reasonable for the Court to accept TSA's submission, that the proper way to look at ACE's response is as an impermissible attempt to start a "horse trading" process. Compliance with rule 42.33 did not require TSA to engage in that process.

In the circumstances, the appropriate order to be made by the Court is an order that the respondent to the notice of motion filed on 8 June 2018 pay the applicant its reasonable expenses incurred in complying with the subpoena to produce filed on 13 February 2018, such amount being fixed in the sum of $12,372.80.

During submissions at the hearing, I informed the parties that, depending upon the decision that I reached, I might invite the parties to make short written submissions as to the appropriate costs order for the Court to make. I have now decided that TSA is entitled to the order sought in its notice of motion. I can see no reason why UCPR rule 42.1 does not apply, and accordingly costs should follow the event. The respondent is also ordered to pay the applicant's costs of the notice of motion. If TSA wishes to claim that the costs should be paid on other than the ordinary basis, it should deliver written submissions to my associate limited to 3 pages within 3 business days, and ACE should respond in like manner within a further 3 business days.