SWM Financial Services Pty Ltd v Lloyd (No 2)

[2012] NSWSC 202

Supreme Court

New South Wales

Medium Neutral Citation:

SWM Financial Services Pty Ltd v Lloyd (No 2) [2012] NSWSC 202

Hearing dates:

20 February 2012

Decision date:

09 March 2012

Jurisdiction:

Equity Division

Before:

Ball J

Decision:

(1) The plaintiffs pay the defendants costs of the proceedings.

(2) The first and second defendants pay plaintiffs' costs directly attributable to the cross-claim.

Catchwords:

PROCEDURE - costs - whether court should make single costs order in relation to failed claim and cross-claim - form of costs order involving failed cross-claim. PROCEDURE - costs - application for costs on indemnity basis - Calderbank offer - whether genuine offer of compromise - whether offer only inviting capitulation. PROCEDURE - costs - where award of nominal damages - not to be regarded as the successful party in the action.

Cases Cited:

Alltrans Express Ltd v CVA Holdings Ltd [1984] 1 WLR 394; [1984] 1 All ER 685
Anglo-Cyprian Trade Agencies Ltd v Paphos Wine Industries Ltd [1951] 1 All ER 873
Baillieu Knight Frank (NSW) Pty Ltd v Ted Manny Real Estate Pty Ltd (1992) 30 NSWLR 359
Baresic v Slingshot Holdings Pty Ltd (No 2) [2005] NSWCA 160
Council of the City of Liverpool v Turano (No 2) [2009] NSWCA 176
Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; 76 NSWLR 603
Leichhardt Municipal Council v Green [2004] NSWCA 341
Mid-City Skin Cancer & Laser Centre Pty Ltd v Zahedi-Anarak [2006] NSWSC 1149
Oshlack v Richmond River Council (1998) 193 CLR 72
Ng v Chong [2005] NSWSC 385
Ng v Chong [2010] NSWSC 127
SWM Financial Services Pty Ltd v Lloyd [2011] NSWSC 1108
The Uniting Church v Takacs (No 2) [2008] NSWCA 172
Wentworth v Rogers [1999] NSWCA 403

Category:

Costs

Parties:

SWM Financial Services Pty Ltd (First Plaintiff)
Michael William Murphy (Second Plaintiff)
Kendall McMaster (Third Plaintiff)
Mark Frederick (Fourth Plaintiff)
Stuart G Lloyd (First Defendant)
Belinda Wu (Second Defendant)
James Finlay (Third Defendant)
Judy Wai Ching Wu (Fourth Defendant)
TTT Australia Pty Ltd (Fifth Defendant)

Representation:

Mr M Condon (Plaintiffs)
Mr R Alkadamani (First & Second Defendants)
Mr S R Meehan (Third to Fifth Defendants)
Somerset Ryckmans (Plaintiffs)
Haywards (First & Second Defendants)
Meridian Lawyers (Third to Fifth Defendants)

File Number(s):

2009/287505

Judgment

1. I delivered judgment in this matter on 31 October 2011 (see SWM Financial Services Pty Ltd v Lloyd [2011] NSWSC 1108). In that judgment, I concluded that the claim against the first, second and fifth defendants should be dismissed, that the first plaintiff should have liberty to apply for judgment for a nominal amount against the third and fourth defendants and that a cross-claim filed by the first and second defendants against the plaintiffs should also be dismissed. The outstanding issues concern costs.

1. Four questions arise in relation to costs. They are:

(a)   What order for costs should be made as between the plaintiffs and the first and second defendants, given that the plaintiffs failed in their claim and the first and second defendants failed in their cross-claim;

(b)   Whether the first and second defendants should be entitled to the costs they incurred in connection with the defence of the claim on an indemnity basis;

(c)   Whether the third, fourth and fifth defendants should be entitled to the costs they incurred on an indemnity basis because they did better than offers of compromise they had made;

(d)   If no to (c), what order for costs should be made given that I found that the plaintiffs were entitled to nominal damages.

Costs of the claim and the cross-claim

1. This issue itself raises two issues. The first is whether the court should make a single order for costs in relation to the claim and cross-claim. The second is, if not, precisely what order for costs should be made in relation to the cross-claim.

1. So far as the first issue is concerned, where the court is in a position to make a rough estimate of the amount of work involved in the claim and the cross-claim, it is often desirable for the court to make a single order that one party or another should recover a proportion of its costs as a means of reaching a fair resolution of the costs in relation to all issues. A single order means that it is necessary for only one party to prepare a bill of costs in assessable form. It also avoids unnecessary disputes about whether particular work was concerned with a claim or cross-claim or both and, in the last case, how the costs of that work should be apportioned. The plaintiffs were content for me to adopt that approach. The first and second defendants, on the other hand, were not. In support of the costs argument, they filed a substantial amount of evidence directed to establishing that much of the work that was done in preparing the case for trial was work that was incurred in relation to the claim and that any costs order I made should reflect that fact. However, to approach the matter in that way necessarily involves an investigation of what work was done by each party before the hearing commenced and an assessment of whether that work was relevant to the claim, the cross-claim or both. In my opinion, if this approach is to be taken for the determination of costs, then it is an approach that is better taken on assessment.

1. In circumstances where there is no agreement between the parties on the approach that should be taken and in circumstances where the first and second defendants seek to rely on work before the hearing began, I think it is appropriate to make orders that the plaintiffs should pay the first and second defendants' costs of the claim and that the first and second defendant should pay the plaintiffs' costs of the cross-claim.

1. The second issue is the precise form of order in relation to the costs of the cross-claim. Mr Alkadamani, who appeared for the first and second defendants, submitted that it was appropriate to make an order that the first and second defendants pay the costs directly occasioned by the cross-claim, with the intention that the plaintiffs not be entitled to recover costs except to the extent that those costs would not have been incurred but for the cross-claim.

1. I accept that submission. The proceedings were commenced on 10 February 2009. In the proceedings, the plaintiffs alleged that they were induced to buy an accountancy practice carried on by the first and second defendants by misleading and deceptive conduct of the first and second defendants. They also pleaded that the first and second defendants breached non-compete obligations contained in the sale agreement and in consultancy agreements that it was alleged they had entered into either at the time or after the sale completed. It was alleged that the plaintiffs suffered loss because the first and second defendants breached obligations they owed to ensure that staff remained as employees of the practice for at least 12 months. The first and second defendants sought to defend that claim in various ways. One way they sought to defend the claim was to lead evidence that the staff were dissatisfied with the new management, that the business did poorly because of the new management practices that were introduced by the plaintiffs and that it was the change in those practices which caused staff to leave.

1. On 4 May 2010, after the principal evidence in the proceedings had been filed, the first and second defendants filed a cross-claim seeking payment of $120,000 which was deferred consideration payable under the sale agreement if the revenue of the practice in the first year following the sale reached $1,400,000. That claim was put in various ways. One way in which the claim was put was that there was an implied term of the sale agreement that the plaintiffs would, following completion, conduct the business efficiently, in a proper, businesslike and professional manner and to the best of their skill and ability and that the plaintiffs breached that implied term and were liable to pay $120,000 as damages for that breach. The evidence relating to the conduct of the business and the plaintiffs' management practices following the sale was also relevant to that allegation.

1. In my opinion, having regard to the timing of the cross-claim and the way in which the case was conducted, the first and second defendants would not have brought their claim for deferred consideration except in response to the plaintiffs' claim. In those circumstances, I think it is reasonable that the first and second defendants should only be liable for costs directly attributable to the cross-claim. They should not be liable for the costs of work that was relevant both to the plaintiffs' claim and the cross-claim.

Should the first and second defendants recover costs on an indemnity basis?

1. The first and second defendants put their claim for indemnity costs on three bases. First, they rely on two offers of compromise, one made on behalf of the first defendant and the other made on behalf of the second defendant, both on 1 June 2009. The two offers of compromise were in similar terms. Both were made on the basis that there would be a verdict in favour of the relevant defendant and that each party would pay their own costs of the proceedings. Having regard to the stage the proceedings had reached, those costs were small.

1. The second basis on which the claim for indemnity costs was put is that the proceedings were maintained in circumstances where the plaintiff should have known that they had no real prospects of success: see Baillieu Knight Frank (NSW) Pty Ltd v Ted Manny Real Estate Pty Ltd (1992) 30 NSWLR 359; Ng v Chong [2010] NSWSC 127. The third basis on which the claim for indemnity costs was put was that the plaintiffs had conducted the proceedings in a way that caused unreasonable delay and expense: Wentworth v Rogers [1999] NSWCA 403.

1. In my opinion, none of these bases justifies an order for indemnity costs in this case.

1. In Leichhardt Municipal Council v Green [2004] NSWCA 341 at [23] Santow JA (with whom Bryson JA and Stein JA agreed) said:

It is clear that an offer with no real element of compromise in it, which is designed merely to trigger the costs sanctions, will not be treated as a genuine offer of compromise. Thus an offer by a plaintiff demanding the full amount claimed was held not to be an offer of compromise attracting costs penalties: Tickell v Trifleska Pty Ltd (1991) 25 NSWLR 353.

Leichhardt Municipal Council v Green was applied in Baresic v Slingshot Holdings Pty Ltd (No 2) [2005] NSWCA 160 at [13] and was cited with approval by Hodgson JA (with whom McColl JA agreed) in The Uniting Church v Takacs (No 2) [2008] NSWCA 172 at [14] and by Basten JA in the same case at [22]. In that case, Hodgson JA referring to the offer said (at [14]):

I do not make any adverse findings as to the bona fides of the Trust; but the offer in this case does have the appearance more of a procedural move to trigger costs consequences than of a genuine attempt to reach a negotiated settlement ...

Basten JA took a similar approach, although his Honour stated that the question was not the purpose for which the offer was made, but whether, in the circumstances of the case, it can be regarded as a genuine offer of compromise. Similarly, in Council of the City of Liverpool v Turano (No 2) [2009] NSWCA 176 at [57], Beazley, Hodgson and McColl JJA said:

In Herning v GWS Machinery Pty Ltd (No 2) [2005] NSWCA 375 the Court referred to the authorities that established there must be a genuine offer of compromise which would be unreasonable for the appellant not to accept in order to trigger the favourable exercise of the costs discretion and noted (at [5]) that:

"The general approach adopted in this Court is that where an offer involves "no real element of compromise" but merely "invites capitulation by the appellant" it will not result in a variation of the usual costs order: see, eg, Townsend v Townsend (No 2) [2001] NSWCA 145 (Giles JA) at [5]."

1. In my opinion, the offers made by the first and second defendants in this case were not genuine offers of compromise. They sought a verdict in favour of the defendants. It is true that the defendants agreed to give up their claim for costs. However, the first and second defendants concede that their assessed costs would have been small at that stage. The offer, in effect, invited capitulation. That is not a genuine offer of compromise; and if the first and second defendants are to recover costs on an indemnity basis in those circumstances, they must establish that the claim was so obviously hopeless that it was unreasonable of the plaintiffs to bring it.

1. As to the second basis, I do not think that the plaintiffs' claim against the first and second defendants for breach of the share sale agreement could be said to be so obviously hopeless that it was unreasonable of the plaintiffs to bring it. The share sale agreement was very poorly drafted. It was at least arguable that it imposed a continuing obligation on the first and second defendants to ensure the employees who worked in the business at the time of the sale could continue to do so for a period of 12 months. In addition, it is clear that some employees left within the 12 month period and it was at least arguable that it was open on the pleadings for the plaintiffs to assert that the departure of those employees involved breach of an obligation to ensure that they remained. It was also at least arguable that the plaintiffs who were parties to the sale agreement suffered a loss as a consequence of those breaches.

1. As to the third point, Mr Alkadamani relied on two affidavits sworn by the first and second defendants' solicitor on 7 June 2010 and 14 February 2011 which were prepared in support of applications before the Registrar for costs. Those affidavits indicate that the plaintiffs were guilty of substantial delay both in giving discovery and in filing their witness statements. There is no suggestion, however, that the hearing itself was conducted improperly. The first and second defendants have already obtained costs orders from the Registrar - in some cases that the costs be payable forthwith. In my opinion, it is not appropriate to revisit those costs orders now.

1. Mr Alkadamani submitted that it was appropriate to reconsider those costs orders now because it is only now that the court is in a position to evaluate the totality of the plaintiffs' conduct. The delays in complying with the timetables fixed by the court should be seen in the context of a case which was weak and failed and in a context where the plaintiffs failed to accept the first and second defendants' offers.

1. I do not accept that submission. It is not easy to see the relevance of the first and second defendants' offers to the conduct of the plaintiffs in pursuing and conducting the case. Either the offers of compromise were genuine offers of compromise and it was unreasonable of the plaintiffs to accept them or they were not. If they were not, as I think is the position, then I do not see how they can be used for some other purpose.

Are the third, fourth and fifth defendants entitled to their costs on an indemnity basis?

1. In support of their claim for costs on an indemnity basis, the third, fourth and fifth defendants rely on two offers of compromise. The first offer of compromise dated 26 May 2009 made an offer in the following terms:

1. that the Proceedings be discontinued as against the third, fourth and fifth defendants;

2. each party pay their own costs of the Proceedings; and

3. the parties enter into a Deed of Release to be prepared by us giving effect to the terms of settlement above, and containing the usual terms relating to confidentiality, releases, non disparagement and the like.

1. The second offer of compromise was made on 23 March 2010. That offer was in the following terms:

The third, fourth and fifth defendants (" Defendants ") consent to the plaintiffs dismissing proceedings No 287545 of 2009 (" Proceedings ") in respect of the Defendants, subject to, the plaintiffs paying to the Defendants the sum of $70,000 in contribution to the legal costs incurred by the Defendants to date in the Proceedings. Such payment is to be made within 28 days of the acceptance by the plaintiffs of the offer. This Offer shall remain open for 28 days from the date of this letter after which time it shall irrevocably lapse.

1. In my opinion, neither of these offers was a genuine offer of compromise. Like the offers made by the first and second defendants, what both these offers did was invite capitulation by the plaintiffs. Again, this is not a case where it could be said that the claim against the third, fourth and fifth defendants was so obviously hopeless that it was unreasonable of the plaintiffs to bring it. It was at least arguable on the evidence that the third and fourth defendants had breached their duties to the plaintiffs by seeking to set up a rival accounting practice while they remained employees of the first plaintiff. They had taken a number of steps to set up their business before leaving the employment of the first plaintiff and they had made misleading statements concerning their intentions. Ultimately, for the reasons given in my judgment, the plaintiffs case failed except in one respect and in that respect the plaintiffs failed to establish that they had suffered any loss. However, that does not mean that the case was so hopeless that it was bound to fail.

1. There are two other difficulties with the offers.

1. First, the first offer was not an offer capable of acceptance by the plaintiffs. It required negotiation of the terms of a deed of release "containing the usual terms relating to confidentiality, releases, non-disparagement and the like". In my opinion, it was not possible for the plaintiffs to identify with certainty the terms of the offer they were invited to accept. Rather, that would need to be a matter for further negotiation. Moreover, in seeking agreement in relation to matters such as confidentiality and non-disparagement, the offer went beyond what the third, fourth and fifth defendants would have achieved by a judgment in their favour. Having regard to those matters, I do not think that it was unreasonable for the plaintiffs to reject the offer.

1. Secondly, so far as the second offer was concerned, that offer required the plaintiffs to pay the third, fourth and fifth defendants $70,000 on account of their legal costs. However, the offer did not identify the third, fourth and fifth defendants' total costs let alone give the plaintiffs a reasonable indication of what those defendants could be expected to recover on assessment. It was not unreasonable of the plaintiffs to reject the offer in those circumstances.

What order for costs should be made in relation to the claim against the third, fourth and fifth defendants?

1. In Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; 76 NSWLR 603 at [684] Campbell JA (Giles JA agreeing) said:

If a plaintiff sues for breach of contract and obtains an award of nominal damages, that empty victory usually does not bring with it an entitlement to costs, as the plaintiff usually is not to be regarded as the successful party in the action ...

His Honour referred to a number of authorities in support of that proposition including Anglo-Cyprian Trade Agencies Ltd v Paphos Wine Industries Ltd [1951] 1 All ER 873 at 874; Alltrans Express Ltd v CVA Holdings Ltd [1984] 1 WLR 394; [1984] 1 All ER 685; Oshlack v Richmond River Council (1998) 193 CLR 72 at 98 [70] per McHugh J; Ng v Chong [2005] NSWSC 385; Mid-City Skin Cancer & Laser Centre Pty Ltd v Zahedi-Anarak [2006] NSWSC 1149 at [47]-[52].

1. There is no reason to depart from that general principle in this case. This is not a case where some right of the plaintiffs is vindicated by the judgment. The plaintiffs' right to a judgment for a nominal amount arises from a minor breach by the third and fourth defendants in failing to tell the plaintiffs their true reasons for leaving the employment of the first plaintiff. That breach hardly went to the heart of the plaintiffs' case and, to use the words of Stephenson LJ in Alltrans Express Ltd v CVA Holdings Ltd at 401, "was not the event at which the plaintiffs were aiming". In those circumstances, the plaintiffs should pay the costs of the third, fourth and fifth defendants.

Orders

1. The orders of the court are:

(1)   The plaintiffs should pay the defendants' costs of the proceedings;

(2)   The first and second defendants should pay the plaintiffs' costs directly attributable to the cross claim.

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Decision last updated: 12 March 2012