Ipsofactoj.com: International Cases  Part 5 Case 13 [NZCA]
COURT OF APPEAL, NEW ZEALAND
- vs -
Pacific Health Ltd
1 APRIL 2003
This appeal and cross appeal from the Employment Court (Judge Colgan) concern costs. The appellant, Dr Binnie, was employed by the respondent, Pacific Health Limited, in Tauranga. He brought common law proceedings in the Employment Court claiming damages for breach of his contract of employment. He had been suspended and subjected to inquiry in relation to suggestions of professional misconduct. Judge Colgan found for Dr Binnie after an eight day hearing. The Judge made the following findings:
Dr Binnie says, and I accept, that part of his motivation in bringing and prosecuting these proceedings in a public forum was to obtain in a public and authoritative way, confirmation of his vindication following serious but completely unfounded allegations of professional misconduct.
I find there were aggravating features of [Pacific Health’s] conduct towards Dr Binnie that met the threshold test of being so flagrant and outrageous that punishment of its actions is warranted.
[Pacific Health’s conduct] was a breach of such fundamental and well known employment case law that it is surprising it sought for so long to maintain its innocence of any wrongdoing.
In effect, as the Judge also found, Dr Binnie was, for various reasons, "forced" to bring proceedings in order publicly to clear his name. Pacific Health was insistent that any settlement (a subject to which we will return) should be kept confidential. Dr Binnie was awarded general damages of $35,000.00, special damages of $13,023.00 and in addition he received a rare award of exemplary damages of $10,000.00 based on the second of the findings noted above. These awards were amply justified. Indeed they can fairly be regarded as modest in the light of other awards in employment cases with which we are familiar.
Pacific Health also agreed towards the end of the hearing to pay Dr Binnie other special damages totalling $13,276.71. The proceedings therefore resulted in Dr Binnie recovering a total of $71,299.71. Pacific Health had made a Calderbank offer prior to hearing of $50,000.00 plus Dr Binnie’s reasonable costs to that point. This feature is at the heart of the cross appeal and we will revert to it in that context.
Against his total recovery of $71,299.71 Dr Binnie has had to pay his own legal expenses which, inclusive of counsel’s fees and disbursements, came to a total of $213,262.70. The costs award in his favour, against which this appeal is brought, was of $80,000.00 plus disbursements of $12,868.00. The result of all these figures is that after paying his own costs Dr Binnie was left with a shortfall of $49,095.53. This result, as he understandably says, is all the more stark in view of the fact that the Judge found that he was forced to bring proceedings to clear his name and his employer’s conduct was so flagrant and outrageous that exemplary damages were justified.
Dr Binnie’s overall contention, as put in Mr. O’Leary’s written submissions, is that: a shortfall of this magnitude in the particular circumstances of this case is inconsistent with equity and good conscience and with the principle that the costs award ought to compensate a party who has been put to expense.
The appeal is based on the proposition that, in making his costs award, the Judge erred in principle and failed to take account of relevant considerations. It is also suggested, as foreshadowed in Dr Binnie’s general submission just mentioned, that equity and good conscience required a higher award. The case is governed by the Employment Contracts Act 1991, and in terms of s135 thereof this Court can intervene only if it is shown that the Judge erred in law. Dr Binnie’s contention is that there were errors of law in the three respects just mentioned.
THE EMPLOYMENT COURT JUDGMENT
Judge Colgan gave close consideration to the recent decision of this Court in Victoria University of Wellington v Alton-Lee  ERNZ 305 which he regarded as analogous to Dr Binnie’s case. He identified the similarities and also the dissimilarities. The Judge correctly said that in the Alton-Lee case this Court, while noting that the practice as to costs in the Employment Court was in some respects different from those applying in other courts, stated some general principles applying to awards of costs in all courts in New Zealand. One of those general principles, as the Judge himself recognised, is that party and party costs should generally follow the event and amount to a reasonable contribution to costs actually and reasonably incurred by the winning party.
One of the problems in this case is that the Judge did not directly apply that principle. He did not state expressly whether he found the costs incurred by Dr Binnie to have been reasonably incurred. That was an issue both before the Judge and before us. Mr. Taylor, for Pacific Health in this Court (he did not appear below), indicated that his client had objected to the reasonableness of the sum of $213,262.70 both in itself, and in particular on the basis of what was said to be a lack of detail in the way the costs element of that total (about $203,000.00) was made up.
Mr. Taylor also argued that in the light of the way the Judge expressed himself he must be taken to have found that Dr Binnie’s costs, although actually incurred, were not reasonably incurred. It is unnecessary to go in detail into the way Mr. Taylor contended that this was a clear implication from the Judge’s reasoning. The Judge observed at one point that in his view 80% of actual and reasonable costs was an appropriate contribution in the present case. Hence, so it is said, it can be inferred from the award of $80,000.00 that the Judge considered no more than $100,000.00 was reasonable. The Judge’s discussion of the High Court costs regime and how the case might be approached in terms of that regime was also said to support the conclusion that the Judge implicitly found that Dr Binnie’s actual costs had not been reasonably incurred.
In the course of his reasoning the Judge made further reference to the Alton-Lee case, saying that there the costs awarded represented about $10,555.00 per hearing day. The result, in the case of an eight day hearing, would be a total of $80,444.00. It seems to have been essentially on that basis that the Judge fixed the figure in the present case at $80,000.00.
A further factor which weighed with the Judge was his view that costs payable by a defendant "must" not be disproportionate to the money value of the plaintiff’s judgment. Mr. Taylor did his best to persuade us that although directing himself in that way the Judge had not in fact taken that absolute approach. It is difficult to be sure because of the need to infer what the Judge’s reasoning process was but it is equally difficult to avoid the conclusion that the Judge imposed a mandatory proportionate cap on his award. The proposition that party and party costs must never be disproportionate to the money value of the plaintiff’s judgment is too absolute, both in itself and certainly in a case where justified public vindication of reputation is a material factor in the litigation. While it is correct to say that costs payable by a defendant should not lightly be fixed at a level which is disproportionate to the sum recovered by the plaintiff, there will be cases where disproportion is justified in the court’s overall discretion.
In approaching the matter as he did, the Judge misdirected himself in law by placing upon himself a mandatory limit to the award of costs. This limit was not appropriate, particularly in the light of the fact that Pacific Health insisted that any out-of-court settlement should be kept confidential. That stance, as the Judge rightly found, forced Dr Binnie to litigate in order to mitigate the damage to his reputation which Pacific Health’s conduct must have caused. The Judge’s conclusion that there was no "loss" of reputation seems to have been accompanied by the inevitable view that there must have been material damage to Dr Binnie’s reputation. Pacific Health’s insistence on trying to keep its outrageous conduct out of the public arena can only have exacerbated that damage. In short, the Judge’s self-imposed cap represented a material error of law.
We are also of the view, in spite of Mr. Taylor’s argument to the contrary, that the Judge did not appropriately apply the principle that party and party costs should generally follow the event and amount to a reasonable contribution to costs actually and reasonably incurred. What is a reasonable contribution depends on all the material circumstances. This principle, as Mr. O’Leary correctly submitted, involves a two step approach.
The first step is to decide whether the costs actually incurred by the plaintiff were reasonably incurred. Adjustment must be made if they were not. The second step is to decide, after an appraisal of all relevant factors, at what level it is reasonable for the defendant to contribute to the plaintiff’s costs. Potentially that level can be anywhere from 100% to 0%. A starting point at 66% is generally regarded as helpful in ordinary cases. Mr. Taylor reflected common practice when he referred to this as the two-thirds rule. If such a starting point is adopted, careful attention must be given to factors said to justify an increase or a decrease.
Per day assessments are of course useful in a general way in making the necessary assessments. But there can be hidden dangers in too rigid an application of that approach. This case is a good example. By dint of the history of the case, Dr Binnie was obliged to incur substantially more legal expenses prior to the commencement of the hearing than normal. He needed urgent advice on his summary suspension, and was fully entitled to have legal advice throughout all the events which ensued. These quite extensive costs are likely to have been incurred before any question of commencing and prosecuting proceedings arose.
The broad approach of two days preparation for every day of hearing is no doubt also a useful rough and ready guide. It should, however, be reconsidered if, as here, the case was well outside the norm in respect of legal expenses reasonably incurred prior to hearing as a result of the defendant’s wrongful conduct.
We offer an additional observation on this aspect of the present case. Legal expenses properly incurred in relation to issues such as wrongful suspension of employees and investigations into their conduct might well be classified as special damages rather than as party and party costs. The latter generally have as their focus the issue of proceedings, preparation for hearing and the hearing itself.
If the proportion of Dr Binnie’s total costs which might have been classified as special damages were treated as such, the amount of party and party costs would be materially reduced. This would have a significant effect on the proportionality issue. In addition, of course, as special damages the costs in question would be recoverable in full as opposed to being recoverable only to the extent of a reasonable contribution. The line between special damages on this footing and party and party costs will often be blurred at the margins, but the point is valid as a general proposition. We do not wish to encourage unduly precise apportionments in this area. Use of the special damages approach should be reserved for cases in which a proper line can be drawn, albeit only in broad terms.
There is however insufficient material before the Court for us to make any reliable apportionment and, as the earlier costs were not claimed as special damages, it is appropriate to regard them as forming part of the plaintiff’s actual costs. Appropriately Mr. Taylor did not suggest otherwise. The point we have been discussing does, however, have a general relevance to the ultimate disposition of the appeal.
Mr. O’Leary argued that if the Judge had applied the correct principles, and had taken all relevant factors properly into consideration, he should have awarded costs on a solicitor and client or full indemnity basis (i.e. 100% of costs actually and reasonably incurred). We consider there is force in the view that such an approach would have been within a properly exercised discretion. The Judge gave no reason for rejecting the submission that costs should be awarded on a full indemnity basis. He simply said that to do so would not be appropriate. His appraisal appears to have been that a contribution of 80% was appropriate. Bearing in mind the general need for some proportionality, and the fact that this Court does not lightly depart from a discretionary decision of this kind (albeit the absence of reasons is relevant in that respect), we are not persuaded that the Judge’s 80% assessment should be altered. That said, we consider that an 80% contribution was at the bottom end of a properly exercised discretion in the circumstances of this case, and we bear that in mind when deciding how we should deal with the suggestion that Dr Binnie’s actual costs exceeded a reasonable level.
The level of contribution is of course the second step of the two step approach earlier identified. We shall deal with the first step after noting a submission made by Mr. Taylor on the full indemnity point. He relied on the decision of Chief Judge Goddard in Counties Manukau Health Ltd v Pack (Auckland Registry, AEC 69/00, 25 October 2002). There the Chief Judge suggested that full indemnity costs should ordinarily be reserved for a case in which the losing party’s case was wholly lacking in merit and its stance had been pursued in a way that could be described as reprehensible. With respect, we consider this to be rather too narrow an approach to whether the discretion to award full indemnity costs should be exercised. We recognise that the Chief Judge introduced his proposition with the word "ordinarily" but even on that basis his two criteria are too limiting. Certainly, if these two criteria can be shown to exist, a strong case for full indemnity costs would be present but they should not be regarded as mandatory considerations requiring some special reason to depart from them. For example, the losing party’s conduct will be relevant overall, not just in the way the case was pursued. The nature of the conduct which entitles the winning party to relief can be relevant to the level at which costs should be awarded. That said, we are not, for the reasons given above, persuaded that the Judge’s 80% assessment should be increased or replaced by a full indemnity approach.
That brings us to the crucial question – 80% of what sum? If the Judge meant to say that no more than $100,000 was reasonable for the "costs and expenses" (see s105 of the Employment Contracts Act 1991) incurred by Dr Binnie then, with respect, we consider this assessment was based on too narrow a legal approach. We have already covered that ground. We must therefore do our best on the information available to determine whether the amount of Dr Binnie’s actual costs and expenses was reasonable and, if not, what figure we should substitute.
We have given careful consideration to the costs memoranda filed in the Employment Court and the material which accompanied them. The breakdown of the total costs actually incurred by Dr Binnie of $213,262.70 is solicitor’s costs $7809.95; counsel’s fees $195,412.50; disbursements $10,040.25. We do not consider any reasonable complaint can be made about the first and the third items, and indeed we do not understand them to be in dispute. We note an adjustment to disbursements in the Judge’s award but this is of no present relevance. As regards counsel’s fees, we are of the view that it was entirely appropriate for counsel of the seniority of Mr. W P Jeffries to have been engaged. The matter was of grave importance to Dr Binnie. His whole career and professional reputation were on the line.
Details of relevant attendances over the period of about six months from February 1999 to September 1999 were supplied, as were details of two succeeding periods each of six months. The information supplied for the first period demonstrates that counsel was extensively, and at times intensively, involved over a period which covered Dr Binnie’s original suspension through to his resignation and acquisition of new employment.
The next phase was from October 1999 to March 2000. Counsel was involved in protecting Dr Binnie’s position with his new employer in the light of difficulties which arose in that respect. Substantial work was then done in preparing proceedings in draft and conferring with Dr Binnie on that subject. Proceedings were commenced towards the end of the period. There then followed quite extensive interlocutory steps, involving questions relating to disclosure of documents, and a number of general matters of pre-hearing management. The way Pacific Health made its pleaded answer to Dr Binnie’s case is of relevance. Although Dr Binnie had been exonerated of any misconduct by an independent inquiry, Pacific Health’s pleaded defence did not appear to accept that exoneration. This reinforced Dr Binnie’s perceived need to go to hearing in order to clear his name in a public and authoritative way.
The third period in which counsel’s fees are analysed is from April 2000 to August 2000. This period covers the lead-up to the hearing which took place over eight days in August, and of course the hearing itself. At this point the involvement of second counsel on Dr Binnie’s side became more substantial. Two counsel were fully justified in the circumstances of this case. Issues involving the need to brief and consider expert evidence were involved. New counsel came into the case on Pacific Health’s side. There was very substantial pre-hearing activity, all of a conventional and necessary kind, and then there was the hearing itself. We are not brought to the view that any of the work done by counsel on Dr Binnie’s side was unnecessary or unreasonably done. The way Pacific Health was approaching the case must clearly have added to the burdens carried on Dr Binnie’s side. The case was such that he was entitled to leave no stone unturned. The point about Dr Binnie’s exoneration at the independent inquiry was not conceded until the hearing itself.
For all this work senior counsel charged a fee of $173,700.00 which included the fees of second counsel. GST of $21,712.50 brought the total fees of counsel to $195,412.50. Pacific Health’s stance in the Employment Court included a complaint about the failure of counsel to particularise their charge-out rates and the hours they had spent. While details of time involved and charge-out rates are often available and supplied, we do not consider such information is a mandatory requirement in a matter such as this, as some of the material emanating from Pacific Health’s side seems to imply. We have not reached the point where counsel are obliged to approach charging for their services on that basis. Obviously this kind of information may help, and its absence may invite a degree of caution, but in the end the Court, when considering whether actual costs are reasonable, has to make a judgment, bearing in mind the proper interest of the losing party in the question.
That may involve two dimensions:
whether the work performed was reasonably necessary, and
whether its cost was reasonable.
Here there can be no complaint that any of the work undertaken by Dr Binnie’s counsel was unnecessarily done. No evidence is available on either side as to the reasonableness of counsel’s costs for the work they undertook. We note that in one of the letters exhibited to the memorandum senior counsel estimated he had spent 650 hours on the case. The work spanned a period of some 18 months and was of a highly important and responsible kind.
In the end this Court must make a judgment which does justice to all concerned. Bearing in mind all the matters we have discussed, we find that the costs actually incurred by Dr Binnie were at a reasonable level, given all the circumstances of the case. We find ourselves unable to conclude that they were unreasonable as to amount. The consequence of this conclusion is that Dr Binnie is entitled to recover 80% of those costs from Pacific Health but subject to our consideration of its cross-appeal.
As earlier noted, the cross appeal is based on Pacific Health’s Calderbank offer made shortly before hearing. That offer was of $50,000.00 plus costs to that point. The lack of a precise offer for costs made the overall offer more difficult for Dr Binnie to assess and accept. He would obviously have been unattracted to settling with the prospect of an argument about what ought to be paid for his costs to that point. Later events on the costs front demonstrate clearly the difficulties in that respect which could reasonably have been anticipated. Calderbank offers which are not inclusive of costs ought sensibly to propose a specific figure for costs to avoid the sort of problem which faced Dr Binnie.
He recovered by judgment a total of $58,023.0. This included special damages of $13,023.00. He also recovered the sum of $13,276.71, which Pacific Health agreed to pay during the course of the hearing. In spite of Pacific Health’s submission to the contrary, we consider that the proper analysis of this result is that Dr Binnie recovered more than the Calderbank offer, either $8,023.00 more or $21,299.71 more. Even if the recovery of $13,276.71 were excluded, we can see no case for excluding the special damages of $13,023.00 for Calderbank purposes. The simple fact is that if he had accepted Pacific Health’s offer, Dr Binnie would have recovered $50,000.00. By going to hearing, he recovered $71,299.71, or at least $58,023.00 and achieved the public vindication to which he was entitled. Therefore we do not consider the Calderbank offer assists Pacific Health either on the basis that Dr Binnie failed to beat it, or indeed on any other basis.
Mr. Taylor made a plea on Pacific Health’s behalf, both on the cross appeal and, as we understood it, on the appeal itself, that it had been "punished enough" by the award of $10,000.00 for exemplary damages. This submission misses the point that party and party costs are not a punishment imposed on the losing party. They are a contribution to or reimbursement of the costs incurred by the winning party. They are thus entirely compensatory and not punitive at whatever level they are fixed. We have considered all the matters which Pacific Health raised through its counsel, both in written and in oral submissions, in coming to our decision in this case which is, in short, that Dr Binnie’s actual costs were reasonably incurred and Pacific Health should pay 80% of them.
The appeal is accordingly allowed, and the cross appeal is dismissed. The Employment Court costs order is set aside. We substitute an order that Pacific Health pay Dr Binnie, for his costs in the Employment Court, the sum of $162,577.96 (being 80% of $203,222.45) plus $12,868.00 for disbursements, making a total of $175,445.96. For costs in this Court, Dr Binnie is awarded the sum of $5,000.00 plus disbursements, to be fixed if necessary by the Registrar.
Victoria University of Wellington v Alton-Lee  ERNZ 305; Counties Manukau Health Ltd v Pack (Auckland Registry, AEC 69/00, 25 October 2002)
DH O’Leary for Appellant (instructed by Tripe Matthews & Feist, Wellington)
LS Taylor & E Warden for Respondent (instructed by Minter Ellison Rudd Watts, Wellington)
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