POWELL v HALLY LABELS LTD CA533/2013 [2014] NZCA 572

POWELL v HALLY LABELS LTD CA533/2013 [2014] NZCA 572 [27 November 2014]IN THE COURT OF APPEAL OF NEW ZEALANDCA533/2013[2014] NZCA 572BETWEEN KEVIN JAMES POWELLAppellantAND HALLY LABELS LIMITEDRespondentHearing: 20 October 2014Court: Miller, Heath and Dobson JJCounsel: C Stewart and G Tanner for AppellantC T Patterson and A M Halloran for RespondentJudgment: 27 November 2014 at 4.00 pmJUDGMENT OF THE COURTA The appeal is allowed.B The costs order in the High Court against Mr Powell is set aside.C Costs in the High Court are reserved pending the decision of the Employment Court on the merits of the parties' claims.D Costs in this Court are reserved pending submissions.____________________________________________________________________REASONS OF THE COURT(Given by Miller J)[1] Mr Powell's employment contract with Hally Labels Ltd (Hally) imposed upon him confidentiality obligations and a restraint of trade. He resigned to work for a competitor, Geon Ltd.1[2] Hally brought parallel proceedings against him in the Employment Court and the High Court for breach of his employment contract, seeking declarations, orders for recovery of confidential information which Mr Powell was said to have taken, and damages.[3] In the Employment Court proceeding Hally moved to enforce the restraint, and it succeeded on 13 June 2011.2 The judgment left for later resolution other issues between the parties, notably claims for damages.[4] In the High Court proceeding Hally also sued Geon, and it obtained ex parte search orders on 20 May 2011 on the strength of an allegation that Mr Powell had taken and shared with Geon 17 specified confidential documents. The searchrevealed that Mr Powell did indeed have a number of Hally's documents, althoughnot those identified by Hally, but he had not shared them with Geon.[5] Hally pursued its High Court proceedings for 17 months, during which it sought and obtained extensive discovery, but without uncovering further evidence of wrongdoing. In the meantime, Mr Powell protested jurisdiction.3 After completing discovery Hally discontinued its High Court proceedings against Geon and Mr Powell, electing to proceed against him in the Employment Court. Its claim is part heard there.[6] In the High Court Associate Judge Matthews ordered Hally to pay costs to Geon on the discontinuance, including disbursements of the discovery exercise.41 His employer was Kiwi Labels Ltd, which is described as a division of Geon, but nothing turnson that. For convenience, we refer to these two companies as "Geon".2 Hally Labels Ltd v Powell [2011] NZEmpC 60 (result decision). For the reasons see Hally Labels Ltd v Powell [2011] NZEmpC 62, [2011] ERNZ 233 [Employment Court reasons decision].3 High Court Rules, r 5.49.4 Hally Labels Ltd v Powell HC Christchurch CIV-2011-409-867, 1 February 2013 [first costs decision].Mr Powell was in a second costs decision refused costs.5 Instead he was ordered topay Hally's costs, including its costs and disbursements of the discovery exerciseagainst both him and Geon.6[7] Mr Powell now appeals the second costs decision. The question is whether the High Court was right to find the presumption that a plaintiff must pay costs on discontinuance was displaced in the circumstances.7Narrative[8] Mr Powell was Hally's national business development manager. The restraint of trade in his employment contract had a 12-month term, enforceable at Hally'soption on payment of six months' base salary. He resigned on 7 December 2010, telling Hally that he meant to work for Geon and in the meantime going on two months gardening leave. Hally promptly invoked the restraint.[9] Mr Powell tried without success to negotiate a reduction in the term of the restraint. It appears that Hally did not pay him six months base salary when invoking the restraint, or when his employment contract ended on 7 February 2011, but rather chose to pay him by monthly instalments over a 12-month period beginning on 14 March 2011. A dispute having arisen about that, and about whether Hally was prepared to negotiate in good faith, Mr Powell cancelled the restraint and began employment with Geon on 28 March 2011. That triggered the Employment Court proceeding.[10] In May 2011 Hally also brought proceedings in the High Court against Mr Powell and the two Geon companies. As its claim was formulated in an amended statement of claim filed on 4 July 2011, it alleged against Mr Powell that he had breached a contractual and equitable duty of confidence by retaining and using confidential information, and that he had converted the same information. The5 Hally Labels Ltd v Powell [2013] NZHC 1760 [second costs decision].6 Second costs decision, above n 5, at [24].7 The discontinuance was granted by consent in the High Court. Consent orders, and costs and matters incidental to such orders, are not given in the chambers jurisdiction, so this Court has jurisdiction to hear the appeal. See Judicature Act 1908, ss 26I(1)(e) and (3).pleading was not confined to relief in aid of the Employment Court claim; it sought final relief and damages both compensatory and exemplary.[11] Hally moved ex parte for a search order. Chisholm J granted the application by minute on 19 May 2011, having been satisfied that Hally had a strong prima facie case. The order authorised named persons to search Mr Powell's home and his office or work space at Geon for Hally's information.[12] The search yielded a number of Hally's documents, but not the 17 it had identified. For purposes of the Employment Court hearing, Mr Powell conceded that the documents yielded on search were confidential.8 The Court found in its decision of 13 June that he knew he ought to have returned them and knew they could benefit his new employer.9 He breached his duties of trust and good confidence by retaining them. For that reason, among others, Mr Powell could not cancel the restraint notwithstanding that, the Court found, Hally strictly ought to have paid him six months base salary as a lump sum when the employment contract ended. The Court was not satisfied that Mr Powell disclosed any confidential information to Geon or anyone else, or that he had used it for his own personal benefit or in any way which could harm Hally.10[13] Hally did not call a halt to its High Court proceeding after executing the search and enforcing the restraint in the Employment Court. Rather, it pursued an extensive discovery and inspection exercise which was not completed until October 2012, as noted 17 months after the proceeding began. The work extended to cloning the entire Geon group computer system. It yielded Hally no misappropriated documents other than those found on the search, and it established that Geon did not have any of Hally's documents.[14] On 11 June 2012 Mr Powell moved for an order dismissing the High Court proceeding on the ground that jurisdiction lay with the Employment Court. Hally opposed that application, which Mr Powell abandoned on 13 August 2012, but he soon secured his objective, for Hally discontinued the High Court proceedings8 Employment Court reasons decision, above n 2, at [47].9 At [46].10 At [48].against both him and Geon on 29 October 2012, electing to pursue him in the Employment Court instead. Mr Patterson conceded before us that Hally may claim there all the substantive relief against Mr Powell that it sought in the High Court.[15] Geon soon sought costs on the discontinuance. In a judgment delivered on 1 February 2013, Associate Judge Matthews ordered Hally to pay its costs on a 2C basis, including disbursements of the discovery exercise.11[16] Mr Powell and Hally both moved by memoranda filed on 31 May 2013 for costs on Hally's discontinuance against him. In the judgment under appeal Associate Judge Matthews held that the ordinary rule that a defendant is entitled to costs on discontinuance was displaced in the circumstances. He awarded costs and disbursements to Hally, including disbursements that Hally incurred in discovery against Geon.[17] The Employment Court proceedings have continued in the meantime. The Court is dealing with Hally's remaining claims against Mr Powell, principally for damages, and his counterclaim for breach of contract. The proceeding is presently part heard and the hearing is scheduled to recommence on 2 February 2015. The claim has changed emphasis. Mr Powell denies that the documents recovered on search were confidential. Hally now intends to plead not that it learned that Mr Powell had copied its confidential information for his own use or that of Geon, but rather that it formed a belief that there was a real and appreciable risk that Mr Powell had done so. It also seeks by way of damages recovery of the costs which it was ordered to pay to Geon in the High Court, together with costs incurred in the High Court in relation to Mr Powell, less any sum which he is actually ordered to pay by the High Court (or by this Court on appeal).[18] Before us each party sought costs on the discontinuance or, in the alternative, an order that costs in the High Court should lie where they fall.11 First costs decision, above n 4.Costs on discontinuance[19] Costs are in the court's discretion, but r 15.23 of the High Court Rules provides that, absent agreement or order, a plaintiff who discontinues must pay thedefendant's costs of the proceeding to that point. The rule's rationale is thatdiscontinuance is ordinarily tantamount to judgment for the defendant.12 It elevates to a presumption the principle that costs follow the result.[20] The Court guards its discretion over costs,13 but as a matter of practice it does not lightly allow a plaintiff to displace the presumption that costs follow discontinuance. We make three points.[21] First, the Court does permit a plaintiff to show that its discontinuance should not be interpreted as failure; the proceeding having ended unilaterally rather than by judgment, the Court is prepared, in a clear case, to recognise that the plaintiff may have achieved its end by other means or otherwise discontinued for reasons not connected to the merits.14 That is consistent with the principle that costs follow the result.[22] Second, the Court may consider, in a clear case, why the parties brought and defended the proceeding, and whether steps taken in it were reasonable.15 For example, a governmental or third party decision may have intervened, rendering the proceeding redundant.16 But this is merely to recognise that the interests of justice occasionally may require that such matters be taken into account.17 It is not to invite a general inquiry into the reasonableness of the parties' conduct.12 High Court Rules, r 14.2(a).13 Kroma Colour Prints Ltd v Tridonicatco NZ Ltd [2008] NZCA 150, (2008) 18 PRNZ 973 at [12].14 Fong v Wong (2010) 20 PRNZ 22 (HC) at [11].15 North Shore City Council v Local Government Commission (1995) 9 PRNZ 182 (HC) at 186 andFong v Wong, above n 14, at [11].16 As happened in Re South East Queensland Electricity Board v Australian Telecommunications Commission (Unreported, Federal Court of Australia, Pincus J, 10 February 1989), the case cited in Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194, which was in turn the authority cited by Tompkins J in North Shore City Council v Local Government Commission, above n 15, for the proposition that reasonableness of the parties' conduct may be taken into account.17 Kroma Colour Prints Ltd, above n 13, at [12].[23] Third, and consistent with what we have just said, a plaintiff may not displace the presumption merely by showing that it had some merit on its side. Indeed, the Court need not consider the merits and ordinarily refuses to do so unless they are immediately apparent.18[24] The Court's reluctance to embark on inquiries into merits or conduct reflects the objectives of the rules, which allow a plaintiff by discontinuance to end its proceeding unilaterally and fix its liability for costs at that point, and further contemplate that the liability should be predictable and the quantum readily calculable.19 To conduct a post-discontinuance inquiry into the merits or thereasonableness of the parties' conduct is ordinarily contrary to these objectives; the inquiry causes the litigation to linger on its deathbed and puts the parties to further expense in pursuit of an uncertain award,20 all of which discourages discontinuance in other cases. Faced with the prospect of such an inquiry, Lord Denning MR said:21It is plain that neither side wishes to go on with the action so as to get hisown costs. But neither side wishes to pay the other side's costs. Each will fight rather than pay the other side's costs. So what is to be done? Is thiscase to go on simply about costs? I think not.The High Court judgments[25] We begin, for context, with the Associate Judge's decision on Hally'sdiscontinuance against Geon.22 An allegation that the parties had agreed to discontinue without costs was examined and rejected. The Associate Judge placed the case in category 2, reasoning that it was not especially complex, but allocated time in band C, stating that; "the ambit of the case, not only in relation to the causesof action involved in the plaintiff's election to proceed with search orders but alsothe extent of discovery, is such that the time required on the part of the second and third defendants' legal representatives to respond to the case can properly be considered to be greater than would be the case in a more straight-forward18 North Shore City Council v Logal Government Commission, above n 16, at 186.19 Rule 14.2(g).20 J T Stratford & Son, Ltd v Lindley [1969] 1 WLR 1547 (CA) at 1553 and North Shore City Council v Attorney-General on Behalf of Building and Housing [2012] NZHC 734.21 Lindley, above n 21, at 1553.22 First costs decision, above n 4.proceeding".23 As that suggests, a good deal of time and effort had been expended in discovery.[26] As noted, Hally and Mr Powell both sought costs on the discontinuance. Mr Powell observed that 2C costs would amount to $67,350 plus disbursements, but his actual costs were only $21,960.30. He sought an award for the lesser amount accordingly. Hally sought an award for the entire proceeding of $86,390, with disbursements of $59,031.74 or, in the alternative, costs of $70,598 and disbursements of $58,814.14 for the search order, discovery, inspection, and opposition to Mr Powell's application to strike the proceeding out for want of jurisdiction.[27] The Associate Judge stated that he would not consider the merits of theparties respective cases beyond noting that Hally succeeded in obtaining "the searchorders which it sought on this proceeding" and was able to enforce Mr Powell'scontractual obligations in the Employment Court.24 Hally having succeeded inobtaining the interim relief that it sought, it was reasonable for Hally to "bring and continue" the proceeding notwithstanding that it was too early to say whether the materials obtained through the search order would ultimately give rise to other remedies.25 He appeared to accept that Hally reasonably believed that it needed to bring proceedings in the High Court as well as the Employment Court, observingthat it is not uncommon for proceedings to be brought in the High Court for the "solepurpose of obtaining one form or other of injunctive relief or other immediateremedy".26 He was also satisfied that Hally was entitled to oppose Mr Powell'sapplication to dismiss the proceeding, but did not explain why that should matter when Hally discontinued very soon afterward.[28] The Associate Judge also attached weight to Mr Powell's conduct before theissue of the proceeding, reasoning that this was a situation where Mr Powell,23 At [31].24 Second costs decision, above n 5, at [19].25 At [20].26 At [20]."occupying a position which gave him access to confidential records of the plaintiff, jumped ship and took up employment with a significant competitor".27[29] The Associate Judge acknowledged criticism of the amount of work undertaken by Hally in relation to materials seized, but held that an analysis of that was beyond the ambit of the application for costs, there being opposing views which could not be resolved on memoranda from counsel; the claim was for costs on scale and the relevant steps on the proceeding were not directly related to time spent analysing seized materials.28[30] The Associate Judge did exclude costs claimed for various case management steps during the period the seized material was under analysis, from May 2011 to June 2012.29 That left a claim for the initial phase of the proceeding up to the grantof the interim orders and the steps relating to Mr Powell's dismissal application.Costs of $70,598 were awarded to Hally for those steps on a 2C basis. The Associate Judge also awarded, without discussion, the disbursements claimed being $58,814.14. It is not in dispute that the disbursements thus awarded include all of the costs of the search exercise as against Geon; many of those expenses must have been incurred between May 2011 and June 2012.Did the High Court err in the exercise of its discretion?[31] We are satisfied that the Associate Judge erred in several respects.[32] The first concerns his premise that the High Court proceeding was concerned with interim relief only. He held that Hally acted reasonably in bringing the HighCourt proceeding "for the sole purpose" of obtaining an immediate remedy.30 We accept that it would have been reasonable to pursue a search order against Mr Powell and Geon in aid of an Employment Court proceeding. But Hally did not do that. It brought parallel proceedings in which it sought damages for breach of contract, and it pursued the High Court proceeding long after the search order was executed. Not until after Mr Powell moved to strike out did it abandon the jurisdiction in favour of27 At [22].28 At [23].29 At [24].30 At [20].the Employment Court. We reject as untenable Mr Patterson's submission that Hallymust be taken to have succeeded because Mr Powell did not move to have the search order set aside.[33] Second, the Associate Judge took an adverse view of Mr Powell's conductbefore the litigation, stating that he had "jumped ship" to work for a rival, and took that into account when awarding costs.31 We observe that Mr Powell disclosed his intentions when he resigned and Hally did not pay him the salary due. As the Associate Judge recognised, the substantive merits are at large. In the circumstances it was premature to rely on an adverse view of Mr Powell's conduct.[34] Third, the Associate Judge appears to have believed that he had confined Hally to its costs of the search order against Mr Powell and the strike out application, excluding the work done in between. However, the costs awarded include discovery and inspection, as Mr Patterson conceded. The Associate Judge appears to have overlooked this. The award also includes costs of the proceeding against Geon, apparently extending to discovery and inspection. If only because band C was chosen, it appears that Mr Powell has been required to subsidise Hally's unsuccessfullitigation against Geon, a result which calls for explanation. Contrary to Mr Patterson's submission, it is not sufficient justification that but for Mr Powell'sconduct Hally would never have sued Geon.[35] Finally, the claim for disbursements suffers from several defects. First, the very large sum claimed is not self-evidently reasonable, and there is nothing to show that the work done was reasonably necessary and reasonably priced. Second, the discovery and inspection exercise never yielded Hally any misappropriated documents other than those found on the initial search.32 In these circumstances it is by no means self-evident that Hally ought to recover all its disbursements even if it is eventually adjudged the victor at trial. Third, the claim includes expenses incurred against a separate party, Geon; on the face of it, these are not expenses of the claim against Mr Powell.31 At [22].32 Mr Patterson put it in this way: " the discovery and inspection process did not reveal any irrefutable wider dissemination of [Hally's] proprietary and confidential information by[Mr Powell] to Geon."What should happen now?[36] Mr Patterson argued that Hally nonetheless ought to have costs in the High Court because it gained its objective, either because its objective was the limited one of getting search orders and discovery or because its wider claims against Mr Powell have sufficiently succeeded in the Employment Court.[37] For the reasons already given we do not accept that Hally's objective in theHigh Court was limited to securing urgent search orders in aid of the Employment Court claim. Nor do we accept that Hally ought to have costs because it acted reasonably by carrying on with High Court discovery until, as Mr Patterson explained, it "decided that the best course of action would be to continue the balanceof its claim in the Employment Court". As we explained earlier, the presumption that costs follow the result is not displaced so easily. Anyway, it is not possible on the material before us to say that Hally acted reasonably. Judged by results, the discovery exercise was a failure; Hally went in pursuit of a smoking gun, only to confirm what the search had already revealed: Mr Powell had not shared Hally'sdocuments with Geon. That left Hally little choice but to abandon its claim against Geon, and with it the High Court jurisdiction.[38] Nor do we accept that the merits of the claim as a whole, including the claims for damages, are plainly with Hally. Not until the Employment Court has done its work can that be known.[39] It follows that the appeal must be allowed and the High Court judgment set aside.[40] The next question is whether Mr Powell ought to have costs on the discontinuance. Hally having failed to show that it secured its objective despite the discontinuance, or that the overall merits plainly favour it, he is presumptively entitled to costs at once, without having to await judgment in other proceedings. However, the search did yield some Hally documents and the Employment Court has held that Mr Powell breached his employment contract by retaining them. Had Hally restricted itself to securing a search order collateral to its Employment Courtproceedings Mr Powell would likely be denied High Court costs in these circumstances and might have to pay Hally's costs. Hally having persisted, he might get costs less an allowance for the search order against him. For these reasons we are not satisfied that he ought to be awarded costs at this juncture.[41] Mr Patterson did not invite us, in the alternative, to fix costs for the search order against Mr Powell and set those off against Hally's liability for costs on the discontinuance. Rather, both counsel asked us, should they fail in their principal arguments, to leave costs to lie where they fall. The appearance of consensus is illusory, however. Hally intends to ask the Employment Court to award damages corresponding to the costs it has incurred, as noted above. Mr Powell does not concede that the Employment Court has jurisdiction to do that. We heard no argument on the point and express no view about it. We think the proper course in the circumstances is to reserve costs in the High Court pending the outcome of the Employment Court proceedings, so preserving the High Court's power to awardcosts should they remain in issue at that time.Other matters[42] We mention, lest it be thought we have overlooked it, Mr Patterson'sargument that because costs were reserved in a conference minute noting the discontinuance, the presumption that costs follow discontinuance was displaced by agreement. This argument ought not to have survived the minute of 30 October 2012, in which Associate Judge Osborne remarked that costs reserved are not costs otherwise agreed for purposes of r 15.23. It may have been otherwise had the parties settled the proceeding33 or had costs been reserved in terms which established that the defendants agreed that costs should await some future event, but costs were reserved only in the sense that the parties wanted to file memoranda in pursuit ofthem. Associate Judge Osborne's minute recorded that the defendants were prima facie entitled to costs on the discontinuance and timetabled Geon's application.33 See Morris Crock Ltd v Cycletreads Ltd HC Auckland CIV-2004-404-4764, 5 December 2005 and Peters v Peters [2013] NZHC 1060.Result[43] The appeal is allowed, and the costs order against Mr Powell is set aside. Costs in the High Court will be reserved pending the decision of the Employment Court on the merits.[44] In the ordinary way Mr Powell, having succeeded here, would have costs in this Court, but we were given to understand that Calderbank offers have been exchanged. We accordingly reserve costs so that counsel may file memoranda directed to the question whether those offers ought to alter the incidence of costs. Ms Stewart's memorandum must be filed by 12 December 2014, and Mr Patterson'sby 19 December. If memoranda are not filed, Mr Powell will have costs as for a standard appeal on a band A basis, with provision for one counsel.Solicitors:McKay Mackie, Waipawa for AppellantJones Young, Auckland for Respondent