Europa International Pty Ltd v Child (No 2)

[2016] NSWSC 1275

Supreme Court

New South Wales

Medium Neutral Citation:	Europa International Pty Ltd v Child (No 2) [2016] NSWSC 1275
Hearing dates:	On the papers
Date of orders:	12 September 2016
Decision date:	12 September 2016
Jurisdiction:	Equity - Commercial List
Before:	McDougall J
Decision:	Order plaintiff to pay defendants’ costs on the ordinary basis up until 1 December 2015 and on the indemnity basis thereafter.
Catchwords:	COSTS – whether costs should follow the substantive event – where unsuccessful plaintiff seeking costs – where plaintiff claims partial success and claims that those issues are clearly dominant or separable – whether it is appropriate to divide up relevant issues - r 42.1 Uniform Civil Procedure Rules 2005 (NSW)   COSTS – whether costs should be awarded on the indemnity basis – Calderbank offer made by the defendants – offer not accepted – whether relevantly unreasonable for plaintiff not to accept offer
Legislation Cited:	Civil Procedure Act 2005 (NSW) Uniform Civil Procedure Rules 2005 (NSW)
Cases Cited:	Bostik Australia Pty Ltd v Liddiard (No. 2) [2009] NSWCA 304 His Eminence Metropolitan Petar v The Macedonian Orthodox Community Church St Petka Inc (No. 2) [2007] NSWCA 142 SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323
Category:	Costs
Parties:	Europa International Pty Ltd (Plaintiff) Keith Michael Child (First Defendant) Kylie Robyn Reddy (Second Defendant) Ian Kingham (Third Defendant) Redkin Equipments Pty Ltd (Fourth Defendant) Kindred Pty Ltd (Fifth Defendant)
Representation:	Counsel: H Mirza (Plaintiff) M J Walsh SC / M J Smith (Defendants)   Solicitors: Carmody Lawyers (Plaintiff) Philip Gengos & Co (Defendants)
File Number(s):	2015/153024

Judgment

1. HIS HONOUR:   On 8 July 2016, I gave judgment which, in substance (and despite the plaintiff’s attempts to rewrite history), found in favour of the defendants: [2016] NSWSC 923. In these reasons, I deal with the costs applications made by each party.

Background

2. To give content to, and facilitate an understanding of, what follows, I set out [1] to [3] of my earlier reasons:

[1]   HIS HONOUR:   The plaintiff (Europa) manufactures and sells an aromatic bitters known as “Australian Bitters Company” bitters, and other alcoholic products. It claims that the defendants “have engaged in the unauthorised use, modification, disclosure and exploitation of [its] intellectual property…and other confidential, proprietary and commercially sensitive information”. Europa seeks injunctive relief in respect of that alleged conduct. That relief is claimed pursuant to contract (in the case of the first and second defendants, Mr Child and Ms Reddy), and on equitable grounds as against all defendants.

[2]   The defendants deny that any of Europa’s information (to use a comprehensive term) that has been sufficiently identified is in fact confidential. They deny that they are using (or intend to use) any such information for their own purposes. Mr Child and Ms Reddy deny that they are bound by any contractual restraints. All the defendants deny that Europa is entitled to relief in equity.

[3]   The defendants have given undertakings to the Court. That was done to resolve an interlocutory application for injunctive relief. However, the defendants accept that they will remain bound by those undertakings, according to their terms, regardless of the outcome of the proceedings. Relevantly for present purposes, the defendants have undertaken not to “use, copy, distribute or disclose the Identified Information or any document containing the Identified Information”. The “Identified Information” is defined in the undertakings to include, among other things, the current recipe for Europa’s bitters product and the proportions of its dry and wet ingredients. In addition, the defendants have undertaken to give at least six weeks’ prior written notice of any recipe to be used by them to manufacture their own bitters product, and the identity of the authors of that recipe.

The issues in dispute in the previous hearing

3. The issues that were contested between the parties, and that were resolved (to the extent necessary) by my earlier reasons were as follows:

Confidential information

1.   What is the proper characterisation of [Europa’s] interest which is sought to be protected?

2.   Has [Europa] identified any confidential information with sufficient specificity?

3.   Does the alleged confidential information have the necessary quality of confidence to warrant protection either:

(a) by an appropriate contractual covenant; or

(b) in equity.

Protection by appropriate contractual covenant

4.   Did either [Mr Child] or [Ms Reddy] enter into a confidentiality agreement as alleged?

5. If they did, does that agreement (and the relevant covenant therein) go further than is necessary to protect a legitimate interest of [Europa]? If it does, can the relevant covenant be read down pursuant to s 4(1) of the Restraints of Trade Act 1976 (NSW)?

6.   Is there evidence of any actual or threatened breach of the terms of any such confidential agreement?

7.    Ought [Mr Child] be restrained from using any information which has become part of his general skill, knowledge and experience?

Protection in equity

8.   On the assumption that any confidential information has been identified with sufficient specificity, does it have the degree of intrinsic importance to warrant equitable intervention?

9.   If so, was such information imparted and received by the defendants in circumstances importing an obligation of confidence?

10.    Is there evidence of actual or threatened misuse of such information?

Relief

11.   Do the undertakings given by each of first, second, third, fourth and fifth defendant on 8 July 2015 provide sufficient protection to [Europa] in regard to its concerns?

12.   If the answer is “no”, what relief is necessary to protect its interests? Is [Europa] entitled to the relief that it seeks in its amended summons?

How those issues were resolved

Issues 1 to 3

4. I concluded that:

1. the confidentiality of the specification of the dry and wet ingredients and additives used to make Europa’s aromatic bitters product, including the respective quantities of those ingredients and additives, could be assumed (but not found), because if those matters were truly confidential, Europa’s interest was adequately protected by the undertakings that the defendants had given to the Court.

2. In any event, there was no evidence of misuse or threatened misuse of that information.

3. Europa’s method of manufacture was not confidential.

4. The only other confidential information identified was financial information of Europa that the defendants had taken with them when they left its employ.

5. There was no evidence of misuse or threatened misuse of that financial information.

Issues 4, 5 and 6

5. I found that neither Mr Child nor Ms Reddy had entered into any confidentiality agreement. It followed that issues 5 and 6 did arise.

Issue 7

6. I found that to the extent there was any “know-how” involved in Europa’s method of manufacture of aromatic bitters (as distinct from the actual recipe to which that method was applied), it had become an integral part of Mr Child’s own know-how, or stock of knowledge, skill and experience. Accordingly, I found, there was no basis for restraining Mr Child from using, otherwise than for the purposes of Europa, his own knowledge, skill and experience.

Issues 8 to 10

7. In essence, the resolution of these issues followed the resolution of issues 1 to 3. It is however important to repeat that there was no evidence of actual or threatened misuse of any of Europa’s information that could be assumed to be, or properly described as, confidential.

Issues 11 and 12

8. I found that Europa’s interests were adequately protected by the undertakings that the defendants had given, and thus that there was no case made out for any further or other relief.

Other observations as to the issues

9. The issues of fact that occupied the great bulk of the hearing were those relating to Europa’s recipe and its method of manufacture, and those relating to the confidentiality agreements that, Europa asserted, Mr Child and Ms Reddy had made. It is important to note at this point that I regarded the evidence of Europa’s principal witnesses – Mr Raj Beri, Mr Anil Beri and Mr Thomas – as unsatisfactory (in the case of the first-named, dishonest in part). My conclusions as to the credibility of those principal witnesses essentially dictated the findings of fact that I made.

10. It is also important to note that I concluded that Europa was using its claim for confidentiality in an attempt to suppress competition from the defendants.

The costs issues

11. The defendants sought an order that Europa should pay their costs on the ordinary basis up until 1 or alternatively 18 December 2015, and thereafter on the indemnity basis. The claim for indemnity costs was based on the service of what they said was a Calderbank offer on the former date, open for acceptance up until the latter. The defendants submitted that:

1. the offer was not accepted (this is non-contentious); and

2. the outcome to Europa of the orders etc proposed by the Calderbank offer was more favourable to it than the outcome of the proceedings.

12. Europa proposed four alternative costs orders:

1. that the defendants pay 90% of its costs;

2. that the defendants pay 30% of its costs;

3. that each party pay its own costs; or

4. that it pay 70% of the defendant’s costs.

13. In support of that surprising variety of orders, Europa submitted that, contrary to the conclusion I had expressed, it had not substantially failed but, rather, had succeeded. The proposition that it had succeeded was based on the defendants’ acknowledgment (which I recorded) that they remained bound by their undertakings given to the Court, according to their terms.

14. Alternatively, Europa submitted, costs ought to be apportioned to reflect what it said was the parties’ relative success or failure on five issues that it identified, said to be “clearly capable of demarcation”, in the proceedings. Those issues, Europa submitted, were:

[56]   The plaintiff’s case was for the protection, either in contract or equity, of certain information it claimed was “confidential”. It brought different and related causes of action seeking alternative relief. The plaintiff considers that the “issues” in this case were clearly capable of demarcation as follows:

(a)   Whether Confidentiality Deeds were entered into and, if so, whether the terms of such deeds afforded the plaintiff any protection in relation to the matters the Confidentiality Deeds were claimed by the plaintiff to have encompassed; (Issue 1);

(b)   Whether the plaintiff’s recipe for the production of its Australian Bitters Company aromatic bitters was “confidential information” and, if so, whether there was misuse or threatened misuse of that “confidential information” (Issue 2);

(c)   Whether information relating to the plaintiff’s licensing arrangements with Sultry Spirits was “confidential information” and, if so, whether there was misuse or threatened misuse of that “confidential information” (Issue 3);

(d)    Whether the plaintiff’s alleged “method of manufacture” was “confidential information” and, if so, whether there was misuse or threatened misuse of that “confidential information” (Issue 4); and

(e)   Whether the plaintiff’s lists and databases of supplier and customers and financial information was “confidential information” and, if so, whether there was misuse or threatened misuse of those categories of “confidential information” (Issue 5).

15. Europa and the defendants provided detailed submissions, in chief and in reply, in support of their respective positions. They also sought to rely on affidavit evidence. In large part, that evidence was apparently tendered to put before the Court the way in which the parties had dealt with each other both at the time of the interlocutory hearing on 8 July 2015 and thereafter up until the hearing. Much of that evidence was, at best, repetitious, and otherwise of minimal relevance to the costs question.

16. I do not propose to burden the reader of these reasons with references to the detail of the parties’ submissions or of the evidence.

Decision

17. The starting point is that:

1. by s 98 of the Civil Procedure Act2005 (NSW), costs are in the discretion of the Court; and

2. ordinarily (or as a “default position”), costs will follow the relevant event (r 42.1 of the Uniform Civil Procedure Rules 2005 (NSW)).

18. In this case, the relevant event was that, although recognising that the defendants remained bound by their undertakings to the Court, I dismissed Europa’s claim against them. I do not agree that recognition of the continuing force of the defendants’ undertakings demonstrates that Europa succeeded. It had the benefit of those undertakings, and the protection that they afforded, from 8 July 2015. If that protection were in substance the outcome that Europa sought to achieve, there was no need for it to proceed beyond 8 July 2015. The very fact that Europa was not content to rest on those undertakings, but pressed its other claims for relief with great vigour, demonstrates that the real event, for the purpose of r 42.1, was the balance of the relief that Europa sought.

19. Thus, I remain of the view that costs should follow the substantive event: the dismissal (save for acknowledgement of the undertakings) of Europa’s claim.

The “separate issues”

20. Before turning to the defendants’ claim for indemnity costs, I should deal with Europa’s submissions on what it said were the five separate issues in the proceedings.

21. The general position is that where there are multiple issues, the Court does not seek to differentiate between them for the purpose of fashioning a costs order. There are cases that recognise that separate costs orders may be made where there is “a particular issue or group of issues [that] is clearly dominant or separable”, in respect of which success and failure do not follow the outcome of the proceedings overall: Bostik Australia Pty Ltd v Liddiard (No. 2) [2009] NSWCA 304 at [38].

22. This is not an appropriate case to seek to divide up the issues. The whole of Europa’s case was put in issue. It succeeded in persuading me that its financial information was confidential (and the defendants did not seriously contest this position, at either the evidentiary level or at the level of principle). Otherwise (apart from my assuming that the recipe for bitters was confidential), Europa failed. Specifically, Europa failed:

1. to demonstrate that its method of manufacture was confidential;

2. to demonstrate that Mr Child and Ms Reddy had entered into confidentiality agreements; and

3. to demonstrate that Mr Child’s stock of knowledge, skill and experience was Europa’s protectable confidential information as opposed to Mr Child’s own unprotectable know-how;

4. to demonstrate any misuse or threatened misuse of information that was either assumed or shown to be confidential; and

5. to demonstrate that it required any protection beyond the undertakings that the defendants had given to the Court.

23. Even if there were, as was submitted for Europa, clearly demarkable separate issues in the proceedings, its level of success was not such as to warrant any attempt to apportion success or failure on those issues and reflect that success or failure in a costs order. At the risk of repetition:

1. I found that Mr Child and Ms Reddy did not enter into confidentiality agreements;

2. I assumed, but did not find, that Europa’s aromatic bitters recipe was confidential, but found that there was no actual or threatened misuse;

3. I found that Europa’s licensing arrangements with Sultry Spirits were not confidential, and that there was no actual or threatened misuse;

4. I found that the method of manufacture was not confidential; and

5. I found that the plaintiff’s records of suppliers and customers were not confidential; its financial information was; but that there was no evidence of actual or threatened misuse of that information.

24. Even if those issues were “clearly dominant or separable” (and in my view they were not), there is no reason why the costs incurred in respect of them should not follow the outcome of the proceedings overall; to the contrary, there is every reason why they should.

The Calderbank offer

25. The background to the making of the Calderbank offer is important. On 5 July 2015, the defendants’ solicitor wrote to Europa’s solicitors, with reference to the interlocutory hearing listed for 8 July 2015, setting out the undertakings to the Court that the defendants were prepared to give (and did give) on 8 July 2015. Either then or shortly thereafter, the defendants’ solicitor confirmed that the undertakings were given “generally”.

26. The undertakings were noted on 8 July 2015. No further orders (of present relevance) were made.

27. The matter was listed for a final hearing in November 2015. For reasons that do not need to be recounted, it did not proceed. On 6 November 2015, shortly before that hearing was due to commence, the defendants provided to Europa’s solicitors the recipe for their own aromatic bitters product (the Kindred recipe). Europa’s solicitors replied the same day. After some sniping about the time at which the recipe had been made available, the letter said:

Generally our client would be satisfied if the “Kindred Recipe 3/11/15” is the recipe that your clients use to produce their aromatic bitters product. To that end our client proposes that your clients provide undertakings to the Court, (in the attached terms) that the named defendants and their related entities will only manufacture aromatic bitters products using the “Kindred Recipe 3/11/15” and going forward, further undertake to give our client details of any intended modifications or changes to the “Kindred Recipe 3/11/15” six weeks prior to the anticipated date for the commencement of the manufacture of any modified aromatic bitters product.

28. The defendants’ solicitor replied on 7 November 2015:

We understand from the content of your letter that your client accepts that the recipe, contained in Confidential Exhibit “KMC” dated 4 November at pages 1 to 2 (the Kindred Recipe) is different to, and not based on, your client’s bitters recipe. Specifically, you have indicated that your client will be satisfied if the Kindred Recipe will be that which is used by our clients to produce the fourth and fifth defendants’ aromatic bitters product.

We are instructed that our clients are not prepared to give the undertakings that are proposed in your 6 November 2015 letter.

The reason for this is that we do not see any need or utility for any further undertakings to be given. Our clients have complied with, and will continue to be bound by, the 8 July Undertakings and see no reason to provide any further undertakings. The purpose of the 8 July Undertakings was to give your client comfort that our clients would not misuse your clients’ recipe either by disclosing it to anyone or by using that recipe to manufacture their own bitters product. Your client has accepted that there has been no misuse of its recipe.

Your client will continue to be protected in the future, until 8 July 2020. This is because our clients will continue to be bound by the obligation to notify your client where there is any change to the list of ingredients that is contained in the Kindred Recipe or where a new recipe has been formulated.

29. The Calderbank offer was made by letter dated 1 December 2015. The offer that it propounded is as follows:

With a view to resolving the matter in its entirety, and so as to avoid the parties incurring unnecessary future costs, our clients offer the following in full and final settlement of the proceedings:

1.   Our clients agree that they will not cause any aromatic bitters product to be sold, distributed or supplied to any wholesaler or retailer for a period of six months from the date that a deed of release is executed which embodies the terms of this offer.

2.   Your client agrees that upon the expiration of the six-month period referred to in (1) above, our clients will be permitted to manufacture and/or sell an aromatic bitters product using the recipe and the process that is set out in the KMC Confidential Affidavit and that your client will not take any steps, including instituting proceedings, to prevent our clients from manufacturing and/or selling any type of bitters product.

3.   The undertakings given by our clients on 8 July 2015 are made as final orders of the Court with the addition of an order to the effect that the obligation in undertaking 1(e) given by each of the first, third, fourth and fifth defendants only applies when our clients formulate a new recipe for aromatic bitters and does not apply when our clients make:

a.   batch-to-batch changes to the brix measurement;

b.   seasonal changes to proportions of ingredients because of varying strengths, season-to-season or if we use substitute ingredients from different countries or sources because of temporary unavailability; or

c.   a different bitters product using the bitters liquid that is made from a “Kindred Recipe” that they have already notified to your client according to undertaking 1(e) given by each of the first, third, fourth and fifth defendants

4.   The proceedings be dismissed with no order as to costs.

This offer is made without any admission as to liability. The offer is also subject to the terms being formally recorded in a deed of release, which we are instructed should contain a term dealing with non-disparagement.    

30. The letter explained why the offer was made. First of all, it referred to the statement of general satisfaction in Europa’s solicitors’ letter of 6 November 2015. Next, it predicted (accurately) that “it is very likely that the Court will find that our clients have not misused your client’s recipe [and] … that your client’s method for producing bitters is not confidential”. The letter added (again accurately) that the Court would be likely to find, in substance, that Mr Child could use his know-how for the purpose of producing bitters according to the Kindred recipe.

31. The reasons concluded with the following:

Your clients almost certainly will not obtain a global order that prevents our clients from producing aromatic bitters at all for any period of time. We reiterate that none of the defendants is subject to any covenant that prevents them from working for, or being involved with, a business that competes with your client.

At best, your client might obtain at final hearing an order permanently restraining our clients from using your client’s recipe for bitters. We note that our clients’ position has always been that they have no intention of using your client’s recipe. The undertakings they gave on 8 July 2015 reflect our clients’ intention in this regard, and our clients are content for undertaking 1(a) to operate in perpetuity.

32. As I have said, it is common ground that the offer was not accepted.

33. On 7 December 2015, the defendants’ solicitor wrote to Europa’s solicitors. That letter stated, among other things:

As we have not received from you any (open) correspondence in relation to the Kindred recipe, we assume that your client has no concerns relating to our clients’ use of the Kindred recipe, which is very different to that used by your client to produce bitters.

34. In the circumstances, that was a reasonable assumption to make, particularly having regard to the statement of general satisfaction in Europa’s solicitor’s letter of 6 November 2015.

35. Europa’s solicitors replied on 8 December 2015. The letter said that they were “puzzled” by that assumption. A week or so later, it became clear that Europa had revised its position, and that Mr Raj Beri and Mr Thomas had put their heads together and decided that the Kindred recipe “is mostly identical [to] or a closely similar derivative or modified version of [Europa’s] aromatic bitters recipe”. Thus, it was said, Europa “has grave concerns about [the defendants’] proposed use of the Kindred recipe”. [Europa] demanded that the defendants “immediately cease and desist from taking any steps to manufacture aromatic bitters using the “Kindred recipe””.

36. Not surprisingly, the defendants declined to provide the undertakings sought. They were justified in taking that position, because the assertions made by Europa through its solicitors were unsustainable. In reality, the two recipes are different. Mr Thomas sought to suggest that they were essentially the same, because the two products had a similar taste. That was nonsense: the information alleged to be confidential was the Sultry Spirits / Europa recipe, not the flavour that its use produced.

37. In my view, the sequence of correspondence, in which Europa moved from a position where it was prepared to accept that the defendants could use the Kindred recipe to manufacture bitters, to a position where it demanded that they undertake not to do so, supports the proposition that in substance Europa was using these proceedings as an attempt to stifle competition.

38. It is clear that the defendants bettered the offer that they made. Put conversely, it is clear that the offer was more beneficial, from Europa’s perspective, than the orders that I made. That is because the offer offered a six month non-competition period, in addition to acknowledging the ongoing restraint flowing from the defendants’ undertakings given to the Court on 8 July 2015. And the offer proposed that each party pay its own costs.

39. It may be accepted that a party who has served a Calderbank offer that has been either rejected or not accepted by the opposing party, and who betters the position propounded by that offer, is not automatically entitled to indemnity costs. All the circumstances of the case must be considered. The question is whether, in those circumstances, the failure to accept the offer warrants departure from the ordinary rule as to costs. See Giles JA in SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 at [37].

40. Further, and as Giles JA recognised in SMEC Testing Services, the decision, whether to depart from the ordinary rule as to costs, must take into account the public interest in the promotion of settlement of disputes.

41. The defendants’ Calderbank offer was clear. It enunciated the reasons why it was made. In the main (and to the extent that it matters), those reasons correctly predicted the decision that I gave. Europa has not suggested that it was given insufficient time to consider the offer, or that it had insufficient information to enable it to consider the offer. Those submissions, if made, could not succeed, having regard to the background that I have sketched in.

42. Europa submitted that there was no real compromise proposed. I do not agree. What I have said at [38] shows why.

43. In my view, Europa’s conduct in declining to accept the Calderbank offer was relevantly unreasonable. A month before the offer was made, Europa (through its solicitor) had expressed general satisfaction with the Kindred recipe. In context, that must constitute a recognition by Europa that there was sufficient difference between the Kindred recipe and its recipe, so that the former could not be said to use, let alone misuse, any confidential aspects of the latter. However, within the time limited for acceptance of the offer, Europa resiled from that position.

44. There is absolutely nothing in the evidence to show that Europa had any basis for resiling from its “November position” in relation to the Kindred recipe. The reasons advanced were specious. The only available inference, and the inference that I draw, is that Europa changed its mind because it was concerned at the threat of competition. As I have said, the correspondence relevant to this issue confirms my earlier view, that Europa (by this stage at least) was using the proceedings in an attempt to stifle competition.

45. In those circumstances, the further obvious inference is that Europa did not concern itself with the merits of the offer (or of the reasons underlying it). Its failure to deal with the offer suggests, at best, a failure to engage with the important public policy in the promotion of settlement of disputes.

46. For those reasons, I conclude that the making and non-acceptance of the Calderbank offer does provide a sufficient basis for departing from the general rule, namely that costs should be assessed on the ordinary basis.

47. That leaves for consideration the time from which indemnity costs should be ordered. In the ordinary way, I would incline to the view that it should not be until the expiry of the time limited for acceptance of the offer that indemnity costs (if ordered) should run. The analogy of offers of compromise might suggest that, on rejection or non-acceptance, costs should run from the date of making of the offer. It is unnecessary to pursue that point because in my view it is clear that Europa had no intention whatsoever of accepting the offer. Thus, in my view, indemnity costs should run from 1 December 2016.

Interlocutory costs

48. There appears to be some question as to whether the costs payable by Europa should include the costs of the interlocutory application of 8 July 2015. The Court (Ball J) ordered that the costs of that application be costs in the cause. The effect of that order is “that the costs of the interlocutory proceedings correspond with the final order for costs in the action”: His Eminence Metropolitan Petar v The Macedonian Orthodox Community Church St Petka Inc (No. 2) [2007] NSWCA 142 at [18] (Beazley, Giles and Hodgson JJA).

Other issues

49. The submissions and evidence raised a bewildering variety of other issues. To my mind, those issues – in particular, those raised in the submissions and evidence for Europa – have no bearing on the fundamental costs question, which is whether any order for indemnity costs should be made. I do not propose to waste time dealing with them.

Conclusion and order

50. The defendants have made good their claim for indemnity costs. I make the following further orders:

1. vary order 3 made on 8 July 2016 by adding the following;

1. the costs so payable are to be paid on the ordinary basis up until 1 December 2015 and on the indemnity basis thereafter; and

2. for the avoidance of doubt, the costs payable pursuant to this order include the costs of the plaintiff’s notice of motion filed on 13 June 2015 and the costs of the parties’ costs applications.

2. Direct that the exhibits in the substantive hearing be returned.

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Decision last updated: 13 September 2016