FEDERAL COURT OF AUSTRALIA

J.H. Lever & Co Pty Ltd v Maniotis [2005] FCA 252

PRACTICE AND PROCEDURE – leave to discontinue – where applicant chose to tender no evidence – whether application should be dismissed or leave to discontinue granted – whether leave to discontinue may be granted on the basis that the respondent pay the applicant’s costs – responsibility of parties to ensure that litigation does not proceed on misconception or an apparent false assumption

COSTS – application dismissed as applicant tenders no evidence – respondent’s grounds for opposition disclosed late in time – whether respondent should pay certain of the costs of the proceeding

Harvey Norman Holdings Ltd v Fels (2002) ATPR 41-852; [2002] FCA 13 cited

O’Neill v Mann [2000] FCA 1680 approved

Re Minister for Immigration & Ethnic Affairs; Ex party Lai Quin (1997) 186 CLR 622 cited

White v Overland [2001] FCA 1333 approved

Nowlan v Marson Transport Pty Ltd [2001] NSWCA 346 applied

Newcomen v Coulson (1878) 7 Ch D 764 applied

J.H. LEVER & CO PTY LTD ACN 008 220 666 v CON MANIOTIS & TASTE MASTER PTY LTD ACN 066 595 944 & ANDREW FOTHERINGHAM & BRETT COPPING

SAD.803 of 2003

MANSFIELD J

21 MARCH 2005

ADELAIDE

THE COURT ORDERS THAT:

(1)                    The application is dismissed.

(2)          The applicant pay to the first, second and third respondents their costs of the application made on 13 October 2003 up to and including 17 September 2004.

(3)                    The first, second and third respondents pay to the applicant its costs of the application made on 13 October 2003 as amended on 26 October 2004 from 18 September 2004 to 1 February 2005, other than its costs incurred solely in relation to the fourth respondent.

(4)                    There be no order for costs in favour of the applicant or in favour of the first, second and third respondents of the application made on 13 October 2003 as amended on 26 October 2004 from 2 February 2005.

(5)                    The applicant pay to the fourth respondent his costs of the application made on 13 October 2003 as amended on 26 October 2004 up to 7 March 2005 to the extent that such costs were incurred solely in his conduct of the proceedings.

(6)                    The parties have liberty to apply.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

INTRODUCTION

1                     The day before the commencement of the trial the applicant indicated that it sought leave to discontinue the application under O 22 r 2(1)(d) of the Federal Court Rules 1979 (Cth) (the Rules).  It had determined to tender no evidence, so that, if leave to discontinue the proceeding were not given, the application would inevitably be dismissed.  The applicant also put forward the apparently surprising proposition that leave to discontinue the proceedings should be on the basis that the respondents should pay their costs of the proceedings from 17 September 2004 to 1 February 2005 and that otherwise there should be no order for costs.  Such a proposition is not unique:  see Harvey Norman Holdings Ltd v Fels (2002) ATPR 41-852; [2002] FCA 13 (Harvey Norman) at 44, 547, [3].

2                     The respondents opposed the grant of such leave.  They submitted that, as the applicant had determined not to proceed with its claim by tendering no evidence, the application should simply be dismissed.  They also claimed costs of the proceedings, and including costs of the application dated 13 October 2003 (an application under O 15A of the Rules for preliminary discovery against certain of the respondents) which came to be converted into the proceeding by order made on 26 October 2004.

3                     The principles upon which leave to discontinue a proceeding is granted have been discussed in a number of cases.  In my view, they are accurately set out in the decision of Finn J in O’Neill v Mann [2000] FCA 1680 at [11]-[13].  His Honour there said:

‘Subject to a qualification I will note below, where the leave of the Court is sought:

“the court will, normally, at any rate, allow a plaintiff to discontinue if he wants to, provided no injustice will be caused to the defendant.  It is not desirable that a plaintiff should be compelled to litigate against his will.  The court should therefore grant leave, if it can, without injustice to the defendant, but in doing so should be careful to see that the defendant is not deprived of some advantage which he has already gained in the litigation and should be ready to grant him adequate protection to ensure that any advantage he has gained is preserved”:  Covell Matthews & Partners v French Wools Ltd [1977] 1 WLR 876 at 879.

The qualification is that inability completely to protect a respondent will not in all circumstances result in leave being refused.  The matter remains one for the exercise of the Court’s discretion in each case:  SCI Operations Pty Ltd v Trade Practices Commission (1984) 53 ALR 283.  The common device employed to protect a respondent is the imposition of terms on an applicant as a condition of the grant of leave:  see eg Young, Austen & Young Ltd v British Medical Association [1977] 1 WLR 881.  Those terms may be so onerous that an applicant for leave may not wish to accept them:  Covell Matthews & Partners v French Wools Ltd [1978] 1 WLR 1477 at 1485.

In relation to the incidence of costs on discontinuance, in the first two of the three categories referred to above (ie discontinuance without leave or consent and discontinuance with consent), it has been held that, unless the Court otherwise orders, the discontinuing party is liable to pay the costs occasioned by the discontinued claim of the person(s) against whom that claim was made and which were incurred before service of the notice of discontinuance:  see Ahmad v Minister for Immigration and Multicultural Affairs [2000] FCA 1436.  This conclusion is a consequence of the combined effect of O 22 r 2 and r 3 and O 62 r 26(1) of the Rules.  The costs consequences to a discontinuing party where leave is required and granted is somewhat more complex.  Unlike with the previous two categories, the Rules do not provide expressly for the incidence of costs on discontinuance with leave, the Court’s power to award costs being that general one provided by s 43(1) of the Federal Court of Australia Act 1976 (Cth) and O 62 r 3(1) of the Rules.  It is a discretionary power to be exercised judicially:  Mineralogy Pty Ltd v National Native Title Tribunal (Full Court of the Federal Court, 23 December 1998, unreported).

It properly can be said that there is an “underlying policy” in the Rules that the discontinuing party should be liable for the other party’s costs unless the court orders otherwise:  Grundy v Lewis (Cooper J, 28 May 1998, unreported).  But so various can be the reasons for, and circumstances of, discontinuance that the policy cannot safely be said to have hardened into a “usual rule” where leave is granted such as exists where there has been a determination of a claim on its merits:  as to the latter see Re Wilcox: Ex Parte Venture Industries Pty Ltd (1996) 141 ALR 727.  The conduct of the parties in the matter and the reasons for the discontinuance can bear heavily on the exercise of the discretion as to costs.  As McHugh J observed in Re The Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; Ex parte Qin (1997) 186 CLR 622 at 625 of one common category of case:

            “… if it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings.  This approach has been adopted in a large number of cases.”

In applying this approach it is not the function of a court to make a prediction as to the outcome of a hypothetical case.  And so in Mineralogy Pty Ltd v National Native Title Tribunal, above, no order as to costs was made where an appeal was discontinued in consequence of an amendment to the Native Title Act 1993 (Cth) that arguably altered the effect on the discontinuing appellant of the judgment appealed against:  see also Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194.  By way of contrast, where the discontinuance can be said to be an acknowledgment by an applicant of likely defeat or where no objective circumstance provides reason for the discontinuance, a costs order in favour of the other party will ordinarily be made.’

4                     Stone J in Harvey Norman expressed similar views.  In addition, her Honour said at 44, 548, [9]-[10] that the observations of McHugh J in Re Minister for Immigration & Ethnic Affairs; Ex party Lai Quin (1997) 186 CLR 622 at 624-625 quoted in the passage in [3] above apply in circumstances such as the present, that is where there has been a decision by the applicant to bring the proceedings to an end, as well as where extraneous circumstances have arisen which deprive the proceeding of any utility. 

5                     In this matter the applicant’s contention is that the respondents should be ordered to pay costs because they acted unreasonably in the conduct of the action, at least for the period from 17 September 2004 to 1 February 2005.  Firstly it is alleged the respondents failed to comply with orders for discovery which, if complied with, would have disclosed to the applicant at an early stage in the proceedings that there was a significant prospect of it not succeeding in its action.  Secondly, it is alleged that, because the essence of the defence to the allegations was not disclosed until belatedly, the applicant proceeded when it would not otherwise have done so.  To understand those contentions, it is necessary to note briefly the history of the proceeding and the nature of the applicant’s claims.

THE PROCEEDINGS

6                     The first respondent resigned from his employment with the applicant from 3 March 2003.  He left on good terms.  The business of the applicant was that of a fragrance manufacturer and wholesaler.  The first respondent in the course of his employment with the applicant had access to its recipes for making its products.  Those recipes were confidential information of the applicant.  Soon after the first respondent left the employment of the applicant, he undertook employment with the second respondent.  It commenced to manufacture and sell by wholesale certain fragrances, which the applicant identified as having very similar, if not identical names and characteristics to certain of the fragrances of the applicant.  The applicant came to suspect that the first respondent had, upon his employment ceasing, improperly taken confidential information of the applicant, namely its fragrance recipes, and that they had been used by the second respondent.  The third respondent is a senior employee of the second respondent and was suspected of participating in the improper copying of the applicant’s fragrance recipes.  In this judgment, I shall call the first three respondents ‘the respondents’.  The fourth respondent was joined as a party later, on 26 October 2004, and his circumstances are in my view somewhat different.

7                     On 13 October 2003, the applicant brought proceedings for preliminary discovery against the first and second respondents under O 15A of the Rules.  On 17 October 2003 an order was made, supported by the usual undertaking as to damages, directed to identifying the person or persons who may have been involved in the suspected unlawful taking and use of the applicant’s confidential information, and to preserve material which in proceedings for such unlawful conduct should properly be discovered and be available to the applicant.  The order was obtained ex parte.  Because the documents and other material sought to be preserved and seized was likely to contain information confidential to the first or second respondents, the orders made included steps to secure that material from the applicant and its directors, at least in the first instance.  The order was promptly executed under the supervision of an independent supervising solicitor and an independent patent attorney.  Such an order is an invasive one.  It is executed without notice.  It is of course made where there is proved to be a fear that the giving of notice of the proposed order to the party which is its subject will result in the destruction of material evidence.

8                     On 27 October 2003 the independent patent attorney nominated by the applicant was authorised to take possession of certain products of the respondents taken under the proposed order for the purposes of carrying out testing and analysis of them. 

9                     A regime was also put in place whereby the records of the respondents, including their computer records, were copied and secured and ‘frozen in time’.  The respondents’ records were then returned so that they could continue to conduct their business.  Orders were made, and varied from time to time, limiting access to the respondents’ records (and later also access to the applicant’s records) to counsel, solicitors and certain independent persons and to the extent necessary the officers of the applicant and to the respondents and nominated officers of the second respondent.  The acknowledged confidentiality in the information of the parties was thereby sought to be preserved.

10                  The independent patent attorney, who is also a trained chemist, provided reports to the Court on 26 and 30 March 2004 (the Perrin reports).  Those reports were in the first place made available to the solicitors and counsel for the parties.  The reports noted significant similarities between 32 fragrance recipes used by the applicant and those used by the second respondent.  She remarked upon both the apparent speed and ease with which the second respondent’s recipes were developed, and the ‘overwhelming similarity’ of the composition of the fragrances.  The patent attorney, however, indicated that her expertise was limited and did not extend to particular expertise in relation to the creation or comparison of perfume formulations.

11                  The applicant was obviously anxious to eliminate, if appropriate, the possibility that the coincidence of the 32 fragrance recipes was consistent with an innocent explanation on the part of the respondents.  Its vehicles to do so were by direct invitation, and by seeking discovery from the respondents.  Before turning to those aspects, there are three features of the material adduced on this issue which it is helpful to note.

12                  Firstly, there are in theory (as it was explained to me by counsel for the parties) at least two explanations for the close coincidence of the fragrance recipes.  One is simply the first respondent having taken the applicant’s recipes.  The other is that the second respondent created the recipes by ‘matching’, that is by chemical analysis of the products of the applicant by a process called Gas Chromatograph/Mass Spectrometer (GCMS).  The applicant accepts that the replication of its fragrances by matching would not involve any use (or misuse) of its confidential information.  It is apparently a relatively common feature of the industry.  As it transpired, the respondents’ evidence was directed to showing that it had ‘matched’ 27 of the 32 recipes alleged to have been taken by the first respondent from the applicant.  The other five fragrances allegedly produced by copying the applicant’s fragrance recipes were said by the respondents to have been produced from recipes acquired lawfully from another fragrance manufacturer interstate.

13                  Secondly, it is clear that matching using the GCMS process leaves a documentary or computer trail.  The records seized pursuant to the order made on 17 October 2003 included the computer records of the second respondent.  The respondents’ personal business records were confidential and were not directly relevant to the claims, except to the extent that they contained discoverable material.  The computer records contained the GCMS data which (according to the respondents’ filed evidence) shows the matching of the 27 fragrance recipes.  The applicant until very recently had no access to those computer records.  The proceeding from April 2004 was directed to having the respondents give discovery, including in accordance with a detailed order of 1 June 2004, and the complex task of restricting access to discovered material to preserve so far as possible consistent with a fair trial of issues the confidentiality of business records.  The GCMS data includes information generated in what are called chromatograph reports or ‘trace’ reports (a graphical presentation of the chemical analysis of fragrances) and peak reports (a printed presentation of the individual components of fragrances) including the chromatogram information, a listing of the elution time, and the amount of chemicals present in the fragrances.  I should note that the matching process is not said necessarily to produce a fully complete and accurate analysis of the contents of a particular fragrance, nor a description of the process of its production.

14                  Thirdly, despite the discovery given by the respondents, the applicant did not perceive that their discovered material revealed matching of the fragrances in respect of which its fragrance recipes were suspected of having been copied.  The point is clearly demonstrated by the proposed principal witness for the applicant, Roland Jan Lever, whose affidavit of 26 October 2004 included his comments upon each of the 32 fragrance recipes.  As an illustration, in respect of one of them, he refers to the possibility of matching and notes that ‘no GCMS analysis nor any flavour creation worksheet has been discovered’.  He then concludes:

‘On the documents discovered given the absence of any working documentation in the Respondents’ discovery recording the development of the recipe for FRA2001 and given the similarities to the Company’s recipe for XC188/1, I can only conclude that Taste Master’s recipe has been copied from the Company’s recipe.’

Lest it be assumed that I have overlooked other material in his proposed evidence, I note that that form of expression is not consistently used by him in respect of each of the 32 fragrances.  The expert engaged by the respondents, whose report of 17 January 2005 was filed on 28 January 2005, disagreed with these conclusions of Mr Lever, and in almost every instance remarked that Mr Lever did not appear to have had the benefit of the relevant peak reports and chromatographs.

15                  It is apparent that the applicant proceeded on the understanding that, generally, the respondent’s material did not disclose the peak reports and (to a lesser extent) the chromatographs which would tend to indicate a matching process by the second respondent whereas it is apparent that such documents did exist.

16                  It is now necessary to refer to the discovery process undertaken also between April and October 2004.  Following the Perrin reports, on 5 April 2004 an order was made (inter alia) that the solicitors for the applicant inform the solicitors for the respondent within 30 days whether the applicant requires further and better discovery and, if so, of what documents or categories or documents or whether the applicant proposed to institute the principal proceedings.  The solicitors for the respondents duly responded that further and better discovery was required.  On 1 June 2004 an order was made, including for further and better discovery by the respondents of certain categories of documents.  That order was, relevantly for present purposes, in respect of the 32 recipes or fragrances referred to above, any recipes used in the manufacture of sub-compounds in the materials for those fragrances, records of GCMS that evidence traces done for any recipe and all working notes or papers purportedly created while producing a fragrance recipe from such reports, or that evidence any recipe or workings for any recipe for any of the fragrances.  The particulars of that order referred to any working papers of the respondents in the preparation, creation and/or development of any of those fragrances and any copies of GCMS traces in their preparation, creation or development.  (My emphasis.)  That formulation was put forward by the applicants.  On 29 June 2004 the respondents filed and served a list of documents in response to and to comply with that order.  Included in the discovered documents were bundles of typed documents entitled ‘GCMS Sample Information Acquisition Date …’ with various numbers.

17                  The respondents were then ordered on 8 July 2004 to verify that list of documents by 30 September 2004.  Ultimately that verification took place on 22 October 2004, following the respondents having secured access to the hard drive held by an independent computer consultant as frozen in time at the date of the execution of the order made on 17 October 2003.  The context of that verification includes the extensive exchange of correspondence seeking any exculpatory material to respond to the apparent coincidence of the fragrance recipes used by the applicant and by the second respondent.

18                  On 26 October 2004, following the verified discovery given by the respondents on 22 October 2004, the preliminary discovery process came to an end.  The applicant indicated it intended to proceed against the respondents for taking and making use of its confidential information, namely the 32 fragrance recipes.  Its understanding of the discovery then given is referred to in [15] above.  Rather than oblige the applicant then to institute fresh proceedings, on 26 October 2004 and on 12 November 2004 directions were given for the exchange of pleadings, affidavits of evidence and other interlocutory steps to have the applicant’s claim listed for hearing.  The hearing was to commence on 7 March 2005.

19                  The matter then proceeded to trial.  The applicant’s pleadings and its evidence were filed on 26 October 2004.  The respondents were given until 28 January 2005 to file and serve their proposed evidence.  Certain of that material was filed by that date, including the report of their independent expert.  As noted above, she indicated the existence of documents to which Mr Lever had not referred and apparently had not had access.

20                  Counsel for the respondents acknowledged that the first occasion upon which the respondents indicated the nature of their explanation for that apparent coincidence in the 32 fragrance recipes (apart from the letter of 3 April 2004 in which the solicitors for the applicant record some information provided by the third respondent) was in an affidavit of the first respondent of 10 November 2004 filed to resist an application for further interlocutory relief.  It was only upon service of the first respondent’s affidavit of his proposed evidence of 1 February 2005 that the respondents clearly indicated the existence of those additional documents, in particular the peak reports.

21                  The explanation for those documents not having previously been discovered or made available was simply that they had not been requested.  In fact, the hard drive containing the GCMS data was formally discovered on 6 December 2004, but access to it was confined to the applicant’s solicitors, and it was later made available to Mr Lever on 8 February 2005.  It was not discovered on 29 June 2004 or in the verified list of documents on 22 October 2004 as it was not asked for, according to counsel for the respondents.  As counsel for the respondents said, the respondents were going to ‘play it by the book’.  The order for discovery of 1 June 2004 required the production of traces and they were discovered but not GCMS data generally, including peak reports.  I suspect that attitude was engendered by the circumstances in which the suspicions of the applicant came to the knowledge of the respondents, that is by the execution upon them of the order of 17 October 2003. 

the request for an explanation

22                  A letter from the applicant’s solicitors to the respondents’ solicitors of 3 April 2004 included the following:

‘I have been instructed that during the meeting between our respective clients on 2 April 2004 that Mr Fotheringham told my client that he could produce GC evidence for traces or records indicating development of all the fragrances that [the applicant] are claiming infringement of.’

The context of the letter was a concern that somehow the third respondent by that time had seen records or documents which the confidentiality regime in place may not have permitted him to have seen.  The reference to GCMS traces was however taken up in the discovery order sought on 1 June 2004.

23                  Any explanation for the coincidence of fragrance recipes in the Perrin reports continued to be an issue.  Originally, following execution of the order made on 17 October 2003, solicitors for the respondents wrote to solicitors for the applicant indicating that they were instructed to deny that any act or omission on the part of any of the respondents could give rise to any remedy which might be available in the anticipated proceedings, but there was no reason for that denial of liability given.  I do not suggest that any explanation was then called for. 

24                  However, following the Perrin reports, the applicant sought an explanation.  On 11 May 2004, in the course of a directions hearing, counsel for the applicant said:

‘We have formed a view that it would not be appropriate to issue proceedings on the current level of material because of the potential that exculpatory material may exist within that discovery we are seeking.’

25                  On 17 September 2004 solicitors for the applicant wrote to solicitors for the respondents renewing that invitation in the following terms:

‘In order to put the matter beyond doubt, my client is of the view that if there were an exculpatory explanation that showed that your clients are innocent of any wrong doing whatsoever, that such an explanation would have been forthcoming either by way of a letter from your firm, or by way of a document or documents.  To date, there has been no explanation in any form.

To avoid costs and further proceedings, I consider it important that a clear opportunity be given to provide such an explanation.

You are therefore invited, now, prior to the final decision being made by my client for the institution for principal proceedings, whether any such explanation can, on your instructions, be given and if so, what that explanation is.’

That letter also asked the respondents to confirm that all documents comprised in GCMS peak reports and GCMS traces for the development of fragrances which the respondents might say were to evidence the legitimate sources of the fragrance produced and supplied by them had been discovered.  It sought further documents to be discovered if there were any.

26                  On 23 September 2004, solicitors for the respondents sought time to respond to those requests.  The applicant solicitors indicated that they declined to provide that extension of time.  The next correspondence was from the respondent solicitors of 27 September 2004 disputing the assertion that an explanation was first sought on 11 May 2004.  It did not otherwise respond to the request for an explanation. 

27                  The next communication was on 28 September 2004 from the respondent solicitors.  It was in the following terms (relevantly):

‘Before any “explanation” can be provided you will need to identify what it is that your clients allege against our clients.  To obtain an explanation in the matter you propose is wholly inappropriate.

The time is well overdue for your client to state precisely its case.  As previously indicated to the court by our counsel, including on 13 September 2004 at par 10, p 12 of the transcript:

“the information has been laid our [sic] before the applicant solicitors and has been before them for some time.  It’s really time for them to bite the bullet, we would say, and has been for several occasions before your Honour.”

As you are well aware, throughout the conduct of these proceedings no precise or particular claim has been made against our clients in relation to any particular act or omission.’

28                  That letter went on to complain that the applicant had not issued proceedings by that time, and had not set out the basis of its claim.  It expressly indicated that, until the applicant set out the basis of its claim, the request for an explanation from the respondents ‘as to unstated matters’ was inappropriate. 

29                  There was then a further exchange of correspondence maintaining the respective positions.  On 18 October 2004 the solicitors for the applicant indicated that the applicant’s case was that the respondents ‘have combined to illicitly use the applicant’s confidential information’.  In my view that had been self-evident since the receipt of the Perrin reports.  The letter continued:

‘If there was an innocent explanation that rebutted the objective evidence and any inference of iniquity, one would have expected by now the production of documents, the filing of an affidavit, the writing of a letter or communicating in some way why the conclusion of iniquity should not be drawn.  Instead there has been silence on the part of your clients.  I point out that innocent explanations, if any, would be matters solely within the knowledge of your client.’

The letter renewed the request for an exculpatory explanation.  It then dealt with a number of particular matters raised by earlier correspondence, and set out the proposed causes of action which might be available against each of the respondents, the relief sought, including damages.  It continued:

‘Against this background, I invite, for one last time, an explanation that would dissuade my client from the conclusions that your clients have engaged in iniquity causative of loss and damage to it.  Again, I reiterate that this is an open letter to be used on matters of substance and on the question of costs.’

30                  The response is, in my view, also significant.  By letter of 22 October 2004, the respondents through their solicitors said:

‘We note that you now assert that “there is a case that [our clients] have combined to illicitly use [your] client’s confidential information”. 

As previously stated in our letter dated 28 September 2004, before any “explanation” can be provided you will need to identify precisely what it is that your client alleges against our clients.

The global assertions relating to supposed causes of action now containing your letter dated 18 October 2004 are not supported by any factual basis and are therefore uninformative.  Similarly, you have not identified which documents your client relies upon other than to say, … “all documents discovered since the commencement of proceedings support the following causes of action …”.

We therefore maintain that unless and until such time as your client states precisely its claim against our clients and the factual basis for it we are unable to provide any explanation.’

31                  The denial of any wrongdoing, first made on 24 October 2003, was reiterated.

32                  It was following the exchange of that correspondence that the supplementary verified list of documents was filed on 22 October 2004 by the respondents.

33                  As noted earlier, on 26 October 2004 orders were made enabling the application for preliminary discovery to be converted into an action for damages and other relief against the respondents.  Promptly following those orders, an amended application, a statement of claim and supporting affidavits were filed and served. 

REASON FOR THE discontinuance

34                  The applicant’s decision to discontinue the proceedings was made only at the last moment.  I accept that it was not made simply because, in the light of the evidence of the respondents, the applicant regarded its case as hopeless.

35                  Mr Lever has deposed to the decision being made on the basis that to continue with the proceeding is uneconomical.  He indicated that some of the information available to the expert engaged by the respondents is different information from that contained on the hard drive computer records of the second respondent seized during execution of the order made on 17 October 2003.  The source of those differences, if indeed they are differences, and the reliability of the independent expert’s opinions proffering explanations for matters which the applicant regarded as significant, and which the respondents contend are consistent with the matching process which they depose to, would involve further considerable cost.  I accept, therefore, that the decision of the applicant not to proceed with the action was for economic reasons.

36                  I also accept that, had the applicant had available to it and had it considered the documentary material upon which the expert of the respondents expressed her opinions, the applicant would not have proceeded with the principal proceedings instituted (effectively by converting the preliminary discovery action into the principal proceedings) from 26 October 2004.  It is on that basis that the applicant contends that it is entitled to costs of the proceedings between 17 September 2004 and 1 February 2005.  The date 17 September 2004 is the latest date by which, the applicant contends, the respondents should have proffered the explanation and the documents which emerged only on 10 November 2004 and 1 February 2005 respectively.

consideration

37                  In my view, the respondents should have their costs of the proceedings up to 17 September 2004.  I think that is the latest date by which their explanation for the coincidence in the 32 fragrance recipes discussed in the Perrin reports should reasonably have been given, either by correspondence or by discovery.  Up to that time, the preliminary discovery process was ongoing.  Ultimately, as I have concluded and as the applicant through Mr Lever acknowledged, the proffering of the explanation ultimately given and the discovery of the documents revealing matching of 27 fragrance recipes and sourcing five fragrance recipes from interstate led to the applicant deciding not to pursue the proceedings.  That process of disclosure and discovery in the particular circumstances of this matter could reasonably have extended to about 17 September 2004.  Had that disclosure and discovery been then given, and the applicant then decided not to proceed (as I have found would have been the case), I see no reason why the respondents should not to that point have had their costs of the preliminary discovery proceedings.  The understandable initial suspicions of the applicant, fortified by the terms of the Perrin reports, would have been allayed or at least would not have been strong enough to take the matter further.  I have allowed in that period time for the applicant to have considered such material from the respondents and to have made its decision covering the future conduct of the proceedings.

38                  However, thereafter, the position in my view is quite different.  In White v Overland [2001] FCA 1333, Allsop J said:

‘However, by way of general principle I would simply like to make perfectly plain my view that in the efficient and proper conduct of civil litigation, even civil litigation hard fought between parties, it should always be recognised that in the propounding of issues for trial the parties should take steps to ensure that all relevant parties to the dispute are cognisant of what the issues are.  Any practice of quietly leaving footprints in correspondence or directions hearings to be uncovered some time later in an attempt to reveal that a matter was always in issue should be discouraged firmly.  Even if something has been said, where it is evident, or indeed suspected, that the other side is proceeding on the basis of a misconception or has not appreciated something, as a general rule, efficiency, common sense and an appreciation of the costs and resources (both public and private) likely to be wasted by confusion in litigation will mandate that a party through his or her representative ensure that the other is not proceeding on a misconception or that the other does appreciate something that has been said.

…

Representatives do not owe duties to the other side’s clients.  They owe duties to their own client.  But no one’s interests are advanced by litigation proceeding on assumptions which are seen or suspected to be false.

…

In the long run, the only consequence of keeping issues hidden or not clearly identifying them is to disrupt the business of the court leading to the waste of valuable public resources and to lead to the incurring of unnecessary costs by the parties, costs which ultimately have to be borne by someone.’

39                  Heydon JA cited that passage with approval in Nowlan v Marson Transport Pty Ltd [2001] NSWCA 346 at [28].  Mason P and Young CJ in Eq agreed with the reasons for judgment of Heydon JA.  Young CJ in Eq at [44] pointed out that it is incumbent on the plaintiff solicitors to seek to confine a respondent by forcing a respondent to state the grounds of opposition to the claim, if necessary, by writing to the respondent solicitors in good time.  That the applicant solicitors did in this matter.

40                  In my judgment this is a matter in which at the latest by 17 September 2004 the respondents should have indicated to the applicant why they said that the fragrance recipes of the applicant had not been copied.  I think it was quite plain by that date, following the Perrin reports that the material procured through the execution of the order of 17 October 2003 led to an inference that 32 fragrance recipes of the applicant had been copied by the respondents.  The respondents, according to their evidence, knew they had not copied that material.  That is because (as their evidence subsequently disclosed) they had matched 27 of those recipes at the request of former clients of the applicant, and had procured five of those recipes from an independent source.  They did not say so.  They must have known their response.  It would have been easy to provide that response.

41                  Instead, the respondents chose to allow the applicants to seek an order for discovery in terms which avoided them disclosing all the GCMS data, and then chose to verify that list of documents again upon the basis that the order itself as requested by the applicant was confined in its meaning.  It may be the reference to GCMS traces in that order flowed from the remarks attributed to the third respondent in the letter of 3 April 2004.  That strategic choice by the respondents resulted in unnecessary costs being incurred in the period from 17 September 2004 to the present.  Those costs, in my judgment, could have been avoided by the respondents laying their cards on the table at an appropriately early time in the proceeding.  One seeks for an explanation as to why that was not done.  The explanation is that it was not asked for in terms.  I do not accept that.  Exculpatory information was asked for.  The response was not given.  I do not think it was an appropriate response to say that no response could be given until the precise nature of the allegations or suspicions was presented.  It was quite clear what the applicant suspected to have occurred, based upon the Perrin reports 2004.  It may be that the respondents took the view that, because of the order executed on 20 October 2003 without notice to them, they need not have co-operated at all.  It may be that they had in mind that the early disclosure of that explanation may have exposed their material to the opportunity to the applicant to investigate it in a more timely manner than ultimately was available to the applicant and so may have been exposed as erroneous.  Those matters are purely speculative.  They are not reasons for my ruling.  What is plain, in my judgment, is that the respondents declined the opportunity to present their explanation for what appeared to be copying of 32 of the applicant’s fragrance recipes in a timely manner despite the applicant through its solicitors having requested that explanation.  I do not think that the terms of the discovery order sought then, and the terms of the limited discovery given then were other than disingenuous.  The respondents must have known at all times precisely what material they had available to them and should have disclosed it at least informally.  In my judgment they are largely responsible for the expenses which were incurred by the parties from 17 September 2004 to the present date.

42                  Counsel for the respondents contended that the applicant was the author of its own ignorance.  It had sought in the discovery order of 1 June 2004 GCMS trace reports only, and not peak reports, although they ought to have known that the process of matching would produce both sorts of documentation, or both sorts of data held on the hard drive of a computer.  If the applicant did not realise that, it is (they submit) as a consequence of the lack of expertise of Mr Lever or alternatively the failure to seek appropriate expert advice.  They also point out that the applicant did not approach any of its former customers to determine whether they had requested the second respondent to undertake matching processes to match its fragrances, or to secure an appropriately qualified expert to analyse the GCMS material which had been discovered.

43                  I have not overlooked those contentions.  There is some merit in them and they must be given weight in the exercise of my discretion.  I have also taken into account in favour of the respondents the fact that the respondents may have been influenced by the lack of trust which the order of 17 October 2003 reflected.  That might justify caution on their part as to how they should respond, but not in my view indefinitely.  I have however come to the view that the respondents should pay the costs of the proceedings for the period after 17 September 2004.  I have taken into account, in addition to the matters referred to, the costs involved in the conduct of these proceedings relative to the loss which the applicant alleged.  The applicant’s claimed loss was not a large amount in absolute terms, although it may have been significant to it.  Equally significant, no doubt, was the desire to prevent the suspected misuse of its confidential information.  The relative financial considerations of the costs to the parties of the proceedings against the potential damages involved was a matter which I raised with the parties from time to time.  Cost is an inhibitant to the assertion of legal rights in proceedings.  That is a fact of life.  Sometimes it is an inhibitant to the defence of legal rights.  The applicant was prepared to incur that cost to assert its legal rights, but was anxious to ensure its rights were as it suspected them to be.  The respondents had the knowledge that its suspicions were ill-founded.  They permitted the applicant to proceed nevertheless without revealing that knowledge, despite the request that they do so.  In my judgment, in the circumstances, the respondents should pay the applicant’s costs of the proceedings from 17 September 2004 to 1 February 2005.

44                  In respect of the period from 1 February 2005 to 7 March 2005, I agree with the contention of the applicant that there should be no order as to costs.  I have found that disclosure of the respondents’ explanation earlier than 10 November 2004 and discovery of all its documents indicating matching of 27 fragrance recipes and the procuring of five fragrance recipes from a third party earlier than 1 February 2005 would have avoided those costs.  This period was one when the applicant was, close to the proposed hearing, obliged to undertake further inquiries and further consideration of those matters in a hurried manner.  In awarding the respondents’ costs to 17 September 2004, I have in fact allowed them costs for a period whilst the applicant would otherwise have undertaken those inquiries.  That is because, in my view, the respondents’ explanation for the coincidence on the 32 fragrance recipes revealed in the Perrin reports should have been forthcoming not long after those reports and by 30 June 2004.  To award the respondents costs for the period from 1 February 2004 would, in effect, give them costs for a period of work by the applicant which I have already allowed for in their favour by awarding them costs to 17 September 2004.  The period from 30 June 2004 to 17 September 2004 allows for such work.  The applicant did not seek costs for that period, as its costs then incurred would have been incurred by it in the period after disclosure of the respondents’ explanation at some time in any event.  If the timing of the disclosure meant that the work of either the applicant or the respondents was somewhat greater after 1 February 2005 than would have been the case with earlier disclosure, there is insufficient material to show how much extra work was involved.  I do not think therefore that that consideration would lead to any different result.

45                  There is one matter which I note to indicate I have not overlooked it.  I have not taken it into account for the reason given below.

46                  The first respondent asserted in correspondence to the applicant that following the cessation of his employment he delivered up to the applicant all documents containing confidential information, including its fragrance recipes.  That is not correct.  By affidavit sworn on 1 February 2005, he deposes to having retained in his possession a copy of the applicant’s recipes (because that was a record he was required to maintain during his employment as a security or back-up copy) and to having destroyed his copy of those recipes in about April 2003.  The applicant, I accept, was aware that the first respondent maintained that duplicate set of its fragrance recipes generally, and I infer including the 32 recipes the subject of the principal proceedings.  However, it did not thereafter specifically raise with the applicant what he had done with those records.  Had it been a matter of specific moment to the applicant, other than as providing the source or potential source of the suspected copying of its fragrance recipes, it could have raised that matter further.  I think this consideration does not weigh in the scales simply because, of itself, it did not play a part in the applicant’s decision-making processes at material times.  The inconsistency between the correspondence and the affidavit only emerged at a very late stage.

47                  The position of the fourth respondent is different.  By order of 26 October 2004 the fourth respondent was added as a party to the proceedings.  He had previously also been employed by the applicant.  By affidavit of 9 November 2004 he responded to the allegations made against him that he too had participated in the improper copying and use of the applicant’s confidential fragrance recipes.  His affidavit denied that he divulged or otherwise discussed with the first or second respondents any confidential information.  So far as I can determine, there is no other information pertaining directly to his position.  In his case, therefore, allegations were made against him and were expressly denied.  He was not otherwise directly engaged in the process of discovery up to 22 October 2004, nor in the communications up to that date.  The proceeding against him is now not to be continued.  I see no reason why he should not have his costs of the proceeding.  The costs which he recovers should be limited to those costs incurred by him specifically, and not costs which would have been incurred by the other respondents as part of their general conduct of the proceeding.  I am not satisfied that the respondents otherwise incurred costs solely because of the fourth respondent being joined as a respondent to the proceedings.  Nor should the applicant have costs of any actions taken in relation to the fourth respondent.

48                  Finally, although the respondents sought indemnity costs against the applicant, I do not see that there are any circumstances which would warrant the exercise of my discretion to make such an order in their favour in respect of the costs I propose to order that they recover.

49                  The respondents contended that the Court should not permit the applicant to discontinue the proceedings because, to do so, would cause injustice to them.  Apart from the issue of costs, they expressed concern about the following matters:

(1)               That the discontinuance of the proceedings would not result in a final judgment so that the applicant could, at a later time, renew its application against them;

(2)               The undertaking as to damages which had been given by the applicant when securing interlocutory orders on 17 October 2003 and on 4, 10 and 12 November 2004 may be unenforceable once the proceedings were discontinued; and

(3)               In support of the undertaking as to damages, a bank guarantee had been provided as required by the Court and the discontinuance of the proceedings (as distinct from its dismissal) would mean the security offered by that guarantee would no longer be available.

50                  As to the first, if I were to give leave to discontinue the proceedings I would do so specifically upon the condition that the applicant should not commence further proceedings against the respondents in respect of the facts pleaded in the statement of claim in this action without the leave of the Court.  Counsel for the applicant indicated that the applicant would submit to such an order.  As to the second, it has been decided that the discontinuance of a proceeding does not result in an undertaking as to damages given in support of an interlocutory order made in that proceeding no longer being enforceable; see Newcomen v Coulson (1878) 7 Ch D 764.

51                  I do not propose to give the applicant leave to discontinue the proceedings.  As O 22 r 1 (2)(d) indicates, discontinuance in the present circumstances is permissive.  It is not a right.  The short reason for my view is that I am not persuaded that the order for costs which I think the justice of the case requires can then be made.  In particular, I am not persuaded that there can be an order giving leave to an applicant to discontinue a proceeding but imposing as a term of the discontinuance that a respondent pay the costs, or some of the costs of the proceeding.  I described the proposition to that effect as surprising.  Counsel for the applicant could point to no case where it has been done.  Logic suggests that it cannot.  The payment of costs is a condition of the leave.  Such an order takes the fulfilment of the condition out of the hands of the applicant.  If a respondent does not pay the costs, then the condition for the grant of leave to discontinue is not fulfilled and at least in theory the proceeding cannot be discontinued.

52                  Counsel for the applicant indicated that the applicant would prefer the proceedings to be dismissed if the result were that it would recover some costs, rather than to be given leave to discontinue the proceedings on the basis that there be no order for costs.  In addition, it was not suggested that dismissal involved any real detriment to the applicant.  Dismissal may involve some form of estoppel, but the reality is that the applicant is very unlikely to have wanted to revive the proceedings, and the grounds upon which it might have been given leave to do so would probably enable it to avoid any estoppel argument from the respondents.  Dismissal means that the potential injustices identified by the respondents are avoided, although I doubt that they were really injustices as appropriate orders could avoid them.

53                  Accordingly, I propose to order that the proceedings are dismissed.  The interlocutory injunctions made on 10 and 12 November 2004 are discharged.  I will give the parties leave to apply to seek any further orders as necessary, including for any lump sum order as to costs.

orders

54                  For the reasons given, I order that:

(1)       The application is dismissed.

(2)       The applicant pay to the first, second and third respondents their costs of the application made on 13 October 2003 up to and including 17 September 2004.

(3)               The first, second and third respondents pay to the applicant its costs of the application made on 13 October 2003 as amended on 26 October 2004 from 18 September 2004 to 1 February 2005, other than its costs incurred solely in relation to the fourth respondent.

(4)             There be no order for costs in favour of the applicant or in favour of the first, second and third respondents of the application made on 13 October 2003 as amended on 26 October 2004 from 2 February 2005.

(5)             The applicant pay to the fourth respondent his costs of the application made on 13 October 2003 as amended on 26 October 2004 up to 7 March 2005 to the extent that such costs were incurred solely in his conduct of the proceedings.

(6)             The parties have liberty to apply.

55                  In my view, having regard to the respective contentions and to the orders which I propose to make, there should also be no order for costs of the argument as to costs.  I have therefore not limited the operation of order (4) above to the date of the proposed commencement of the hearing.  I record my view that the hearing of the arguments as to costs did not involve any time separately addressing only the circumstances of the fourth respondent, other than a moment or so, so I have limited order (5) to reflect that position.

Associate:

Dated:              21 March 2005