EVOLUTION E-BUSINESS Ltd v BEN SMITH NZEmpC AK
 NZEmpC 58
IN THE EMPLOYMENT COURT AUCKLAND
In The Matter Of proceedings removed from the Employment Relations Authority
And In The Matter Of an application for costs
Philip Skelton, counsel for the plaintiff
Defendant in person assisted by his father Mr Brian Smith JP
Application for costs by defendant employee following successful defence of proceedings by former employer — employee claimed total costs of $91,000 — represented by counsel only in interlocutory matters — legal costs incurred by employee paid by present employer as loan to the employee and deducted from his bonus — whether payment of a successful litigant's legal costs by a third party meant those costs were not recoverable — whether indemnity costs could be awarded — what would be the appropriate award of costs.
The issues were: whether the failure to produce the costs arrangement document as part of general disclosure affected S's entitlement to a costs award; whether payment of a successful litigant's legal costs by a third party meant those costs were not recoverable; and, whether indemnity costs should be awarded.
Held: Although S failed to produce the costs arrangement document as part of his general disclosure, Evolution was not prejudiced. The thrust of the contents of the document were clearly disclosed in evidence and Evolution had had the opportunity to cross-examine on it. On its face, the document appeared to be a genuine loan document. A successful employee litigant was entitled to a costs award even if those costs were paid by a third party such as a union, employer or insurer. The fact that S had to reimburse TTL made his position even stronger.
This was not a case for an award of indemnity costs. The litigation was not totally lacking in merit and Evolution's conduct could not be categorised as so reprehensible or exceptional that indemnity costs could be ordered.
Costs in the Authority were normally awarded on a tariff basis between $2,500 – $3,500 per hearing day. The breakdown for costs in the Authority amounted to $13,300. However, there was no investigation in the Authority, only a determination of an application for removal of the dispute to the EC based on written submissions. Therefore the award for costs in the Authority would be $2,500.
The EC was first required to determine whether the costs had been reasonably incurred and then, after an appraisal of all relevant factors, the level at which it was reasonable for the unsuccessful party to contribute . A starting point at 66 per cent of the reasonably incurred costs was generally regarded as appropriate.
No allowance could be made for the attendances on S's security for costs application as it had been unsuccessful. Although the lawyers for S said they had contributed to its preparation, they were no longer acting at that time. A reasonable contribution for the discovery process was $5,000 ($7,500 had been claimed). Evolution should not have to contribute to the application to withdraw. An allowance of $10,00 would be made for miscellaneous attendances
COSTS JUDGMENT OF JUDGE A D Ford
In the substantive proceeding in this case, the plaintiff (Evolution) sought damages and other relief against the defendant, its former employee, for alleged breaches of his employment agreement, in particular, his duties of good faith and confidentiality. In a judgment 1 dated 26 August 2011, I found against the plaintiff.On the issue of costs, I stated that the defendant was not entitled to costs in respect of the hearing because he had not been represented by legal counsel, but I noted that he did have lawyers acting for him on a number of interlocutory matters and I accepted that in connection with those attendances he was entitled to claim an award for legal costs and disbursements reasonably incurred. I invited the parties to endeavour to reach agreement on the costs issue, failing which I set a timetable forfiling memoranda. I also requested the defendant to attach receipted invoices to his memorandum together with an appropriate explanation of the services provided by his lawyers.
Settlement did not prove possible and the memoranda filed by the parties raised new issues for consideration by the Court which could only be dealt with by allowing additional memoranda to be filed addressing those new issues.
In his first memorandum filed on 15 September 2011, Mr Smith attached 13 invoices and a credit note from Kensington Swan covering the period 9 December 2009 to 22 February 2011 for fees and disbursements (including GST) totalling $91,326.40. None of these costs or disbursements related to the seven-day hearing itself which did not commence until 27 June 2011. In addition to the Kensington Swan charges, Mr Smith also sought to recover airfares of $5,308.02 and taxi fares of $210. Mr Smith attached to his memorandum a copy of various email exchanges between the parties which indicated some frustration on his part in resolving the costs issue because Evolution had changed its legal representation and was obtaining a second opinion as to whether or not it would file an appeal in the matter.
On 13 October 2011, a memorandum was filed on behalf of the plaintiff with respect to the issue of costs. It confirmed that Evolution had changed its legal representation to Russell McVeagh and that Mr Skelton had been instructed as counsel in the matter. Mr Skelton's helpful memorandum referred to the recognised legal principles in relation to awards of costs and then made a number of relevant observations in response to the defendant's claim in the present case. In summary, the submissions counsel made were:
1. There was no evidence before the Court that Mr Smith had incurred the legal costs he was now seeking to recover because each of the Kensington Swan invoices was made out to Transactor Technologies and marked for the attention of Mr John Norrie of that company. (Transactor Technologies and Mr Norrie had figured prominently in the substantive proceedings. That company had been a joint-venture partner with Evolution in developing a particular form of technology and the breakdown of their joint-venture partnership had resulted in litigation between the two companies in the High Court and, indirectly, in Evolution's Employment Court claim against Mr Smith. Mr Smith went to work for Transactor Technologies in the United Kingdom after leaving Evolution.)
2. Mr Smith had failed to provide details as to the services provided by Kensington Swan. Each invoice simply recorded “Professional services for the period…” No other information was provided and no indication was given as to the nature of the legal services provided, the authors who provided the services or their hourly charge out rates.
3. “$91,326.40 is not and is nowhere near a reasonable fee to charge for the interlocutory steps taken by Kensington Swan in the Authority and before the Employment Court prior to Kensington Swan ceasing to act in February 2011.”
4. “This is not one of those exceptional cases where the Court should award indemnity costs (as claimed by the Defendant) and depart from the usual rule of two thirds of reasonable actual costs incurred.”
There was significant substance in each of the points made by Mr Skelton and further time was given to Mr Smith to respond. In his Memorandum in Response dated 22 November 2011, Mr Smith attached a breakdown of the various Kensington Swan invoices. In response to the submission that the legal costs had been incurred by Transactor Technologies rather than the defendant personally, Mr Smith said:
5. I also append herewith the ledger from my employer, Transactor Technologies Ltd (“TTL”) (“ Appendix BS-2”) in respect of their loan to me to cover the legal costs I incurred with Kensington Swan. As provided in evidence during the course of the hearing, I am still repaying the loan to TTL via a monthly deduction of the bonus incentive I am entitled to for managing TTL's project in the UK under the terms of my Employment Contract.
Mr Skelton then filed a lengthy supplementary memorandum dated 14 December 2011 in which he made submissions on the itemised Kensington Swan accounts and responded to the allegation by Mr Smith that TTL had advanced him a loan to cover his legal costs which was being repaid out of bonuses which would otherwise have been payable to him by TTL each month. Mr Skelton submitted:
11. No loan documentation has been produced to evidence a legal obligation on the part of the defendant to repay money advanced to him. TTL did not advance money to the defendant which he then used to pay Kensington Swan. If, as alleged by the defendant, this was a bona fide loan, Kensington Swan would have invoiced the defendant for the services provided, TTL would have made a loan advance to the defendant, there would be financial records showing the money being advanced to the defendant, and there would be a loan agreement or some written...
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