26.11.2018

Employment Litigation Costs: In for a penny, in for a pound?

Vindication is frequently offered as a motivation for litigation.

Inevitably, people litigate to prove that they were right, but generally, one party will come off second best. Unless a litigant has an unlimited budget, litigation has real potential to become uneconomic. In our experience ‘it’s all about the principle’ almost always turns, at some point, to being all about the money.

Litigation is an expensive business: time is money, and litigation takes a significant amount of time. Time is usually, and almost universally, underestimated.  The cost of litigation will generally increase in proportion to its complexity, but even relatively uncomplicated litigation can require a significant financial commitment. The risk is that without a considered cost-benefit analysis at the outset, the price of a ‘win’ could result in a pyrrhic victory. A recent determination of the Employment Relations Authority illustrates this point.

Johnson v Fourth Estate Holdings (2012) Limited

Mrs Johnson was a Senior Advertising Account Manager and then Partnership Executive at Fourth Estate Holdings Limited which publishes the National Business Review (NBR).  Mrs Johnson did not meet her individual sales budgets and, despite the NBR claiming that it supported her and gave her multiple chances to improve, she failed to do so. The NBR dismissed her. 

Following her dismissal, the NBR learned that Mrs Johnson had sent a number of emails containing the NBR’s sensitive information from her NBR email account to her personal email account.  It obtained an interim injunction in the High Court against Mrs Johnson preventing her from using the information.

Around the same time, Mrs Johnson brought a claim in the Authority against the NBR alleging that she was unjustifiably disadvantaged and dismissed.  The NBR brought a claim against Mrs Johnson, alleging that by taking the NBR’s confidential information, she had breached the terms of her individual employment agreement, her duties of fidelity, and good faith.

The Authority found that Mrs Johnson was unjustifiably dismissed for reasons that included the fact that there was no investigation of any performance concerns before dismissal, and no raising of any concerns with Mrs Johnson before her dismissal.  It awarded her $8,000 as compensation for injury to feelings (where she was seeking $50,000) and $1,666.67 in lost wages (where she was seeking $19,076.93). 

However, it also found that Mrs Johnson had breached her employment agreement and ordered her to pay a $9,000 penalty, $6,750 of which was payable to the NBR and the balance to the Crown.

As a result of the Authority’s determination, Mrs Johnson was ‘ahead’ by about $100 after tax, but this does not take into account the costs of the litigation.

The Authority’s determination identified that Mrs Johnson had incurred “approximately $96,000” in legal costs as a result of the litigation (High Court and the Authority).  The Authority did not make a determination as to what costs were payable, and by whom, but did give an indication that its view was that costs would be likely to “lie where they fall” (that is, both parties would absorb their own costs, and would not be awarded any contribution to costs) on the basis that both parties had some success with their claims.

Mrs Johnson subsequently told the NZ Herald that “I was never in this for the money. For me it was extremely important as a matter of principle to stand up to the NBR… I was aware all along the costs would be more than I got back”. While it appears that Mrs Johnson was willing and able to absorb some costs, we are not sure that she anticipated $96,000 in fees at the start.  That level of costs, to achieve a partial victory, for many applicants will not be feasible.

In order to determine whether to proceed to litigation, one needs to have an understanding of the costs regimes in the Authority or Court.

The Costs Regime in the Employment Relations Authority and Employment Court

The Authority has a wide discretion to award costs.  The applicable costs principles are set out in 2005 in the Employment Court decision in PBO Limited (formerly Rush Security Ltd) v Da Cruz, and confirmed by the full Court in 2015 in Fagotti v Acme & Co.  In Fagotti, while the Court recognised that the Authority has a general discretion to award costs and endorsed Da Cruz, it focused on the “notional daily tariff” the Authority commonly applies.  The Court considered that “there is significant value in a commonly applied and well publicised notional daily rate for costs in the Authority”, which “enables parties and their representatives to assess more accurately from the outset” their costs.  It then warned that parties who incur costs beyond the notional daily rate “cannot confidently expect to recoup” them.

The notional daily tariff the Authority usually uses is $4,500 for the first day of the investigation meeting, and $3,500 for any subsequent day. That is its starting point for a costs assessment.  There may be increases or decreases applied for matters such as conduct during the proceedings, Calderbank offers, and the complexity of the matter.

Normally, the Authority will encourage the parties to resolve costs between themselves, and failing agreement, it will invite submissions before making a determination.  In most cases, an unsuccessful party should expect to make a contribution to the successful party’s costs, and absorb their own.

The Employment Court

From January 2016, the Court has adopted a Guideline Scale of costs, which is intended to promote a predictable, expeditious and consistent approach to the award of costs which will allow parties to calculate and settle costs issues themselves. The Guidelines do not, however, replace the Court’s ultimate discretion to make an award of costs.   

The process mirrors the High Court’s approach to the determination of costs. At the start of a proceeding, the Court will determine the appropriate categorisation of the proceeding (from straightforward to complex).  Costs are then assessed by applying a daily recovery rate to the time considered reasonable for each step (e.g. commencing a claim, or preparing a defence) reasonably required in relation to the proceeding.

 Conclusion

Historically, compensatory awards made in employment jurisdiction are modest but there is some evidence that awards are increasing over time. Nevertheless, it is crucial that the risks and rewards of any mediation or litigation are contemplated at an early stage.

The desire for vindication or vengeance and the illusive ‘principle’ are common objectives in litigation, but these emotional factors should be considered relative to the likely costs and risk. Even a win often comes at a significant price.  As Jean-Paul Sartre observed: “Once you hear the details of victory, it is hard to distinguish it from a defeat”.  In Mrs Johnson’s case, this seems to be true.

Do you need expert legal advice?
Contact the expert team at Hesketh Henry.
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