FEDERAL COURT OF AUSTRALIA

J.H. Lever & Co Pty Ltd v Maniotis [2006] FCA 1668

J.H. LEVER & CO PTY LTD v CON MANIOTIS, TASTE MASTER PTY LTD, ANDREW FOTHERINGHAM AND BRETT COPPING

SAD 803 OF 2003

MANSFIELD J

4 DECEMBER 2006

ADELAIDE

REASONS FOR JUDGMENT

1                     The respondents seek an order that their costs, recoverable pursuant to orders made on 21 March 2005 and 17 February 2006, be assessed as a gross sum pursuant to O 62 r 4(2)(c) of the Federal Court Rules.  For the sake of clarity, I shall refer to the respondents in that way, even though it is their application under consideration and I shall refer to the applicant in that way even though the order sought is against the applicant.

2                     The applicant has been ordered to pay to the respondents their costs for the periods 13 October 2003 to 17 September 2004 and 11 November 2004 to 7 March 2005.  The respondents for their part have been ordered to pay to the applicant its costs of the proceedings for the period 18 September 2004 to 10 November 2004.  The costs orders concerning the fourth respondent are a little different, but the contentions did not separately address his position, and in view of my ruling on the application, I do not need to do so.  The applicant has not requested its costs to be fixed in a gross sum, and is presumably content at present to proceed to tax its costs in due course.

3                     The principles upon which the power under O 62 r 4(2)(c) should be exercised are relatively straightforward.  They have been discussed in a number of cases:  Beach Petroleum NL v Johnson (No 2) (1995) 57 FCR 119 (Beach); Sparnon v Apand Pty Ltd [1998] FCA 164; Hadid v Lenfest Communications Inc [2000] FCA 628 and Dunstan v Human Rights and Equal Opportunity Commission (No 3) [2006] FCA 916.

4                     The respondents claim that it is appropriate to exercise that power to avoid the expense, delay and inconvenience arising on the taxation of a bill of costs.  They have in fact prepared a draft bill of costs in taxable form running to some 530 pages and some 3,000 separate entries.  The present nominal total of the costs so specified is $844,334.  Obviously, the process of taxation would be extensive and prolonged.  In addition, the respondents rely on the circumstance that the applicant (they claim) does not have the financial capacity to meet any order for costs in full, or any additional costs involved in the taxation.

5                     The evidence indicates that, as at 1 August 2006, the applicant had assets of $337,601, and liabilities of $358,764.  The liabilities included a loan from the directors of the applicant of $130,000.  By order made on 28 July 2006 the applicant was restrained from dealing with its assets, save for paying a specified regular sum for the living expenses of its directors.  That order was subsequently varied to allow the applicant to pay specified amounts to its creditors from time to time.  Those payments may be made provided that the proposed payment is first notified to solicitors for the respondents, supported by a certificate from the applicant’s accountants that the proposed payment is to an existing creditor unrelated to the applicant or its directors, and provided the respondents do not then object to the proposed payment.  The respondents were given the opportunity to bring any disputed payment to the attention of the Court.  To date some $89,000 has been paid to creditors of the applicant by that process.  There is no evidence to suggest that the applicant has improperly divested itself of assets, although it has sold its business.

6                     I am satisfied that there is a significant prospect that the respondents will not be able to recover all their taxed costs in due course.  It is apparent that their costs will be quite substantial.  Assuming that the applicant’s balance sheet as at 1 August 2006 is correct, there was then a small excess of liabilities over assets.  The liabilities then identified did not include an allowance for the costs liability to the respondents.  The information indicates that the applicant has ceased trading, so that progressive payments to its creditors may reduce the assets available to its creditors generally.  As counsel for the respondents indicated, when their taxed costs are ultimately fixed, the respondents are unlikely to be able to fully recover them and may be unable even to rate pari passu with all creditors of the applicant paid since 28 July 2006. 

7                     In those circumstances, in my view it would be appropriate to make a lump sum order for costs in lieu of the taxation of the respondents’ costs simply to avoid the additional expense of taxation, the delay associated with taxation of the costs, and to avoid the respondents incurring the costs of taxation in circumstances where taxation of costs will impose a significant extra burden on them but where there is, on the evidence, a likelihood that they will not be able to recover those costs, nor in any event the full amount of their taxed costs.

8                     I have not overlooked the submissions of counsel for the applicant that it is unnecessary to make a gross sum order for costs because the bill of costs has now been drawn in taxable form, and because the Registrar may make an estimate of the approximate total for costs under O 62 r 46(3) quite promptly.  However, the evidence does not satisfy me that the drawn draft bill of costs is presently in an appropriate form to commit the respondents to lodge it, and I accept there is still considerable work to be done before it is in that form.  In any event, there will be a considerable expense in taxing those costs.  And an estimate by the Registrar will be difficult when, as in this case, there is such a discrepancy between the amount charged and the bill of costs in taxable form.

9                     The next step is to determine whether a gross sum order for costs can, and should, be made on the material before the Court.

10                  Order 62 r 19 of the Federal Court Rules directs the taxing officer to allow such costs as are necessary or proper.  The observations of O’Loughlin J in Auspine Ltd v Australian News Print Mills Ltd (1999) 93 FCR 1 indicate that the Court should adopt a similar approach, that is to fix a gross sum representing costs which are necessary or proper, when making an order under O 62 r 4(2)(c).  Von Doussa J in Beach at 123 said:

“On the one hand the Court must be astute to prevent prejudice to the respondents by overestimating the costs, and on the other hand must be astute not to cause an injustice to the successful party by an arbitrary ‘fail safe’ discount on the cost estimates submitted to the Court.”

In considering whether a gross sum order for costs can properly be made, the Court must have regard to those considerations.

11                  The means by which the Court may be satisfied as to the appropriate amount for a gross sum costs order will differ according to the circumstances.  Not uncommonly, there is an independent costs consultant who has examined the file and can provide an opinion as to the extent to which the costs claimed have been necessarily or properly incurred on a party and party basis.  The basis of charging, especially if it is an hourly or time-item rate, is sometimes subject to a small and random testing by an independent costs consultant against the taxation outcome under the Rules.  The knowledge of the Court about the nature of the matter, and the issues involved, may be addressed.  Sometimes, the basis for charging has been disclosed and compared to “scale rates” or to Court-published guidelines or to rates commonly allowed on taxation.  Sometimes there is a combination of such material.  There are other procedures or matters which have been taken into account. 

12                  In this matter, the respondents rely upon the fact that the draft bill of costs has arrived at the sum of $844,334, and upon their claim for a gross sum for costs being for $475,219.  The latter sum is the amount the respondents’ solicitors actually charged the respondents.  Hence, it is contended, the claim for a gross sum for costs should be allowed at the considerably lesser figure of $475,219.  The claimed costs are made up of solicitors’ costs of $319,211, counsel fees of $138,046 and other disbursements of $17,961.

13                  The claimed gross sum for costs of $475,219 includes GST.  The respondents now accept that the GST component cannot be recovered from the applicant, as they are entitled to input tax credits and will have been reimbursed the GST component of fees paid by them.  Consequently, that figure must be reduced by 1/11^th (Treneski v Comcare [2004] AATA 1998; Australian Taxation Office Goods and Services Tax Ruling 2001/4:  Goods and Services Tax: GST Consequences of Court Orders and Out-of-Court Settlements).  The gross sum for costs which is now sought is therefore $432,017.

14                  I do not place much weight upon the fact that the draft bill of costs has reached a much larger figure than the amount sought as a gross sum for costs.  The draft bill of costs is not the basis upon which the solicitors for the respondents have charged the respondents.  The applicant, through counsel, has raised in a general way significant concerns about many items in the draft bill of costs and suggested that many items would not be allowed either at all or on a party and party basis, or would be substantially reduced.  The concerns raised include that there are many duplications, that there are many instances of items which would not be allowed on taxation, and that there are many items which would not be allowed on taxation in the amounts claimed.  The respondents have not responded to those general contentions.  That is entirely understandable.  To do so would be to embark upon a process of quasi-taxation.  But I am left with the draft bill of costs not reflecting the actual basis of charging and as not providing, except in the coarsest way, an indication of the potentially recoverable costs on taxation.  I do not think, in those circumstances, that I should reason from its amount that the claimed gross sum for costs itself only reflects work for which the applicant should be responsible under the costs orders.

15                  As noted, the gross sum for costs claimed reflects the actual amounts charged to the respondents by their solicitors (including disbursements) for the period for which the respondents are entitled to recover costs from the applicant.  Necessarily, therefore, the claim assumes that all the legal work which was performed during those periods and which has been charged for is properly recoverable on a party and party basis from the applicant, and that the rate or rates at which the work was carried out is properly payable by the applicant on a party and party basis.

16                  It is convenient to address the rates of charging first.

17                  The solicitors’ retainer specified an hourly charge rate for work done for the respondents.  The hourly rate agreed varied with the seniority of the solicitor doing the particular work.  It also varied over time.  I am satisfied that the hourly rates charged from time to time were less than the hourly rate applicable under item 31 of Sch 2 to the Federal Court Rules, where hourly or part-hourly charging is appropriate.  I am also prepared to find that hourly charging for all work done does not in this instance lead to a higher amount for the work done being charged than would be appropriate under the scale in Schedule 2.  I therefore accept that, for the purpose of determining a gross sum for costs, the amounts actually charged for solicitor fees represent on a party and party basis a proper rate of charging, and would not unfairly impose on the applicant an inappropriate costs burden by using an hourly charging rate rather than an item by item rate.  I also  accept that the amounts so charged (and claimed) reflect professional time actually spent in the conduct of the matter.

18                  It is a separate question whether all of the work so carried out at those rates should properly be recoverable on a party and party basis from the applicant.

19                  I am also satisfied that the solicitors for the respondents have excluded from the gross sum for costs as claimed not only their costs as charged for the period in respect of which the respondent is not entitled to recover costs, but also the costs associated with the mediation conducted in March 2005.

20                  Counsel engaged by the solicitors for the respondents have also charged at hourly rates.  Those hourly rates are at the lower end of the National Guide to Counsel Fees issued by the Registrar of the Court.

21                  As in the case of the solicitors’ fees, I am therefore satisfied that, for the purpose of determining a gross sum for costs, the amounts actually charged for counsel fees represent on a party and party basis a proper rate for charging and would not unfairly impose on the applicant an inappropriate costs burden.  I also accept that the amounts so charged (and claimed) reflect professional time actually spent in the conduct of the matter.

22                  Again, it is a separate question whether the work so carried out at those rates should be properly all recoverable on a party and party basis from the applicant.

23                  The difficulty I have is in determining the extent to which the work so carried out is properly work for which the applicant should be liable on a party and party basis.  The formulated claim by the solicitors for the respondents is upon the basis that each and every hour of work for which they, and counsel, have charged should be so recoverable.  I am not persuaded that that is the case.

24                  It is correct that the matter was somewhat complex.  It was commenced by the applicant seeking an order for pre-action discovery, in the context where the applicant suspected that the respondents (in particular through the first respondent, who had been an employee of the applicant) had improperly taken or had access to the applicant’s business records, namely certain of its recipes for the manufacture of flavours and fragrances.  Ultimately, it appeared that the respondents had been able to produce comparable fragrances to those of the applicant so quickly after the first respondent left the applicant’s employment by the process of deconstructing certain fragrances (lawfully acquired) so that their elements could be identified and the fragrances reproduced.  It was not the applicant’s case that, if that is what had happened, the respondents would have acted unlawfully.  Consequently, the applicant did not proceed with its claim.  That is an oversimplification of the claim of the applicant, and of the response of the respondents.  The respondents had different responses in respect of a few of the fragrances which the applicant claimed had been reproduced by the wrongful access to its recipes.  However, that picture is sufficient for present purposes. 

25                  The proceeding continued for some time in its pre-action discovery mode.  Commercial confidentiality resulted in a large number of directions hearings when different access regimes for access to the parties’ material were explored.  Orders were subsequently made converting the proceeding into an inter partes proceeding in its current form.  On 12 November 2004 detailed directions were given and the matter was listed for hearing on 7 March 2005.  Obviously substantial work was then required to be undertaken by the solicitors for the respondents to prepare the matter for trial.

26                  There are three features of the pre-trial preparation which attract particular attention.  That is not because there are only three respects in which it is unclear that the time spent by counsel and solicitors should not be recoverable against the applicant, but because those three features are addressed in the affidavit in support of the present application.

27                  One feature concerns the time spent in preparing an affidavit of the first respondent for the hearing.  His affidavit totals 133 pages and has three lever arch folders of annexures totalling 1127 pages.  Over 190 hours was spent taking instructions and preparing the affidavit.  There is no independent evidence that all of that work was proper or necessary on a party and party basis.  There is no evidence from an independent cost consultant which confirms the reasonableness of that work, either in its entirety or in part.  It is not a function of the Court on an application such as the present to itself engage in a detailed analysis of the process of quantification of the claimed costs. 

28                  The first respondent’s affidavit explained the process of de-constructing certain products of the applicant, using in part a gas chromatograph mass spectrometer, and by that process how the second respondent had been able to develop its own recipes to produce more or less equivalent fragrances to those of the applicant.  The evidence discloses also that, to confirm the legitimacy of that process, inquiries were made to identify a suitably qualified expert in a relatively short time frame and that one was identified who was available in the United Kingdom at the relevant time.  The senior solicitor conducting the matter personally attended with confidential documents and the relevant fragrance samples in the United Kingdom to assist in briefing that expert and securing her expert report in a timely manner. 

29                  Allowing for the complexity of the issues which arose in the proceedings, I am not presently able to be satisfied that 190 hours was proper or necessary on a party and party basis for the preparation of the affidavit of the first respondent.  I raised my concern with counsel for the respondents in the course of the hearing, and pointed out that my concern may have been assuaged by a relatively straightforward report from an independent costs consultant.  Further written submissions were made, but no application to adduce further evidence on the application was made.  I have not counted the charged hours for time spent conferring with the first respondent prior to the directions for the respondents’ witness statements to be filed, and prior to the order for the listing of the matter for trial.  But, given the nature of the applicant’s suspicions, and subsequent allegations, and the long history of the matter, I presently assume that the respondents, particularly through the first respondent, had by the directions hearing on 12 November 2004 already given instructions that there had been no improper use of the applicant’s recipes but that certain fragrances had been duplicated by the deconstruction process referred to above.  I assume also that, at least in general terms, the first respondent had explained to the solicitors the nature of that deconstruction process.  The proofing of the second respondent, therefore, so far as I can presently assess, involved putting into a formal structure his instructions, explaining in detail the process by which certain fragrances of the applicant came to be imitated and were in fact imitated, and then in relation to each of the 32 recipes under consideration, addressing that process, and the documentation generated in the course of the deconstruction process as to how the particular recipe and fragrance of the respondents came into existence. 

30                  I am not presently persuaded that all the time spent on that statement, in the light of those considerations, was necessary or proper on a party and party basis so as fairly to visit that cost on the applicant.  It may well be a proper cost.  It may be that the first respondent’s process of giving instructions was more convoluted than it need have been.  It may be that my assumptions about the instructions he had given the respondents’ solicitors over the proceeding lengthy period are erroneous.  There may be other explanations as to why nearly five ordinary full-time working weeks were necessarily or properly spent on his preparing his witness statement.  At present, I do not have sufficient information to be satisfied that the time spent on the first respondent’s affidavit should be allowed as necessary or fair so as to visit all of that cost on the applicant.

31                  On the other hand, I must do justice to the respondents.  It would be inappropriate to cut back the properly chargeable hours for the preparation of the first respondents’ affidavit to some lesser figure which might deprive the respondents of their proper costs.  At this point, any such cut back would not be an informed one.

32                  As mentioned above, I have not addressed whether the time otherwise spent on taking instructions from the respondents from time to time is properly recoverable on a party and party basis.  The applicant, through counsel, has had the opportunity to consider the detailed accounts of the respondents’ solicitors.  No other issues about the hours spent, and charged for, in variously taking instructions by the respondents’ solicitors has been raised.  Unless such matters were raised, I would take a generally conservative approach to those charges by treating about 15 per cent of the hours charged as being beyond the proper party and party costs, but would then allow a fees uplift for care and consideration to cater for the complexity of the matter.  The result would be that, unless the applicant were specifically to have raised areas of particular concern, I would otherwise fix the respondents’ solicitors’ fees at the amounts charged, other than for the time spent on the first respondent’s witness affidavit.  I do not intend that intimation of my present views to foreclose the applicant from raising in a timely manner any such concerns if the respondents continue to pursue a gross sum costs order.

33                  Obviously, extensive attendances were necessary in the course of preparation for the hearing, including very significant work in taking instructions, preparing witness statements and the like.  For the reasons given, however, I am at present not able to be satisfied that all the time expended was in fact necessary or proper so as to be included in the charged hours upon which a gross sum for costs payable by the applicant should be awarded.  As I am unable to be satisfied that all the hours charged by the solicitors were reasonable and necessary on a party and party basis, and as I do not have a sufficient foundation in fairness to the respondents to determine some lesser number of hours as appropriate, in my view, it is not appropriate on the material before me to fix a gross sum for costs.  I decline to do so.

34                  The second concern about accepting the present claim arises from the counsel fees charged.  As I have indicated, that is not because the rates charged are not proper on a party and party basis, or because the work charged has not been done.  The concern is whether all the work done is properly recoverable on a party and party basis.

35                  Counsel for the applicants pointed out that if the counsel fees are allowed at $250 per hour for a 10 hour day (i.e. $2500 per day), as the claim is for $138,046, that represents in excess of 55 days work.  If allowance is made for an eight hour day, that represents in excess of 69 days work prior to the hearing.

36                  There was, of course, considerable work involved in addressing the pre-trial discovery issues, compounded by the commercial confidentiality of all parties which needed to be respected.  There were some 10 or so attendances on directions hearings before the matter was listed for hearing.  Making due allowance for those matters, I am not presently satisfied that it would be fair to the applicant to allow all those costs as properly incurred on a party and party basis.  They may all be properly allowable.  There may be reasons why more work was done than would be allowed on a party and party taxation, and which should not be included in a gross sum costs order, including that the respondents’ instructions were not given as clearly and precisely as they might have been.  On the other hand, as with the solicitors’ costs, I do not think it would be fair to the respondents to substantially cut the claimed counsel fees on an intuitive judgment as to what is or might be a proper amount for party and party costs.  Of course, I do not intend to indicate that it is necessary to descend into a detailed costing exercise, but at present I am unable to form a view, fair to both the applicant and the respondents, as to what should be allowed for counsel fees as part of a gross sum for costs.

37                  The disbursements total $17,961.  They largely reflect the fees of an expert engaged by the respondents for the purposes of the hearing, and travelling expenses of $7384 for the senior solicitor for the respondents to travel to London to retain and instruct that expert.  I note a discrepancy between the claimed disbursements and those described in the affidavit supporting the application – it includes accommodation, transfers and food totalling $2990 not apparently otherwise claimed as a disbursement.  In view of my decision on the application, that can readily now be cleared up by the respondents.

38                  There are three issues raised by the applicant in relation to those costs:  whether the engagement of an overseas expert was necessary or proper; whether it was necessary or proper to attend in person in London to instruct that expert; and whether it was necessary or proper for that travel to be in business class.  The applicant contends that the fees and expenses claimed should be allowed on a party and party basis as part of the gross sum for costs.

39                  I am satisfied that, given the relatively short period between the fixing of the hearing date and the proposed hearing date, the solicitors for the respondents made proper inquiries as to the availability of an appropriate expert and identified the expert which they engaged.  The applicant does not dispute that the engagement of an appropriate expert was proper.  I have no reason not to accept the amounts charged by the expert as proper, and to include them in any gross sum order for costs.

40                  It is presently unclear to me why a personal attendance was necessary to brief that expert.  It may have been, but I do not think the evidence is sufficient to show that it was.  Certainly, from the point of view of having the respondents’ documents examined, to opine whether they were consistent with having been the appropriate and necessary documents to emerge from the process of deconstruction of the applicant’s products as the respondents claimed, and to opine as to the technical availability of the deconstruction process, such an attendance was unnecessary.  It is said, however, that it was also necessary for the expert to physically examine the samples to confirm, by olfactory examination, that they were more or less equivalent to, but not produced from, the applicant’s recipes or to explain olfactory differences.  I am not satisfied at present that that step was necessary or proper.  It may have been, but it is not clear to me that the expert engaged would profess an independent expertise in the olfactory analysis of fragrances, or that such a skill (assuming there is such a recognised field of training and expertise) was necessary to be engaged to support the respondents’ defence to the claim.  As I understood the respondents’ case, they set out to replicate the applicant’s fragrances in a legitimate manner and (apparently) successfully did so, or did so well enough, to satisfy those persons who would otherwise have acquired the applicant’s fragrances.

41                  As I do not propose, at present, to make a gross sum order for costs, I think it is preferable at present simply to note those concerns.  If the application for a gross sum for costs is revived, there may be further evidence which advances the claim of the respondents in that regard.

42                  For those reasons, I presently decline to make a gross sum order for costs as sought in par 1 of the notice of motion.  I will hear the parties as to costs.  I will also hear the parties as to whether it is appropriate simply to dismiss the motion, or to adjourn it to a date to be fixed with liberty to apply in the event that the respondents seek to revive their application in due course with additional evidence.

Associate:

Dated:         1 December 2006