Brook Asset Management Limited v Firmin

[2012] NZHC 1104

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-3591 [2012] NZHC 1104

BETWEEN  BROOK ASSET MANAGEMENT LIMITED

First Plaintiff

ANDBROOK ASSET MANAGEMENT PTY LIMITED

Second Plaintiff

ANDMACQUARIE NEW ZEALAND LIMITED

Third Plaintiff

ANDMEL TONY FIRMIN First Defendant

ANDDEVON FUNDS GROUP LIMITED Second Defendant

Judgment:      23 May 2012

JUDGMENT AS TO COSTS OF NON-PARTY OF ASSOCIATE JUDGE SARGISSON

This judgment was delivered by me on 23 May 2012 at 12 pm pursuant to

Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date ..........................

Solicitors:

Langton Hudson Hutcher, PO Box 3690, Auckland

Russell McVeagh, PO Box 8, Auckland

Bell Gully, PO Box 4199, Auckland

BROOK ASSET MANAGEMENT LIMITED V FIRMIN HC AK CIV-2010-404-3591 [23 May 2012]

[1]      There are outstanding issues of costs for determination. This judgment deals with those issues.

Background

[2]      During   the   course   of   completing   discovery   and   inspection   in   these proceedings, the plaintiffs sought the agreement of a non-party, Goldman Sachs & Partners New Zealand Ltd, to allow them to inspect parts of its computer system. The plaintiffs’ purpose was to locate documents that Mr Glass, one of the directors of the second  defendant,  Devon  Funds Group Ltd, acknowledged  were relevant to matters in issue in the proceeding but which he said he no longer had control of.[1]

[1] He indicated that such documents were created on a computer owned by Goldman Sachs which

Devon had been permitted to use.

[3]      On  29  October  2010,  though  on  the  cusp  on  reaching  agreement  with Goldman Sachs, but faced with the need to comply with timetable directions, the plaintiffs filed a formal application seeking an order allowing them to inspect:

(a)       The computer or laptop used by Mr Glass or Devon while Devon was

operating from Goldman Sach’s premises between February and June

2010; and

(b)      Goldman Sach’s mail server, computer and “computer system” (as

that phrase is defined in s 248 of the Crimes Act 1961).

[4]      The  agreement  that  was  reached  provided  that  Goldman  Sachs  would undertake an inquiry for the purpose of ascertaining:

(a)      Whether Goldman Sachs had the ability, without Devon’s consent, to provide the information that the plaintiffs requested for use in the litigation; and

(b)Whether the information created by Mr Glass between 22 February and 30 June 2010 and stored on the computer server provided by

Goldman Sachs in fact existed in Goldman Sachs’ possession.

[5]      It was understood by both sides that Goldman Sachs would be reimbursed for the cost of undertaking the inquiry.  Goldman Sachs had asked the solicitors for the plaintiffs to  provide their  undertaking to  reimburse the costs  (both  internal  and external) in respect of the work necessitated by the inquiry.  Goldman Sachs gave an estimate of cost $2,000 - $3,000 (excluding GST if any).  On 29 October a principal of the firm of solicitors acting for the plaintiffs advised Goldman Sachs that an undertaking was given (emphasis added):

Thank you for your letter. I now have instructions ... in respect of the work (which we understand to be limited to ascertaining whether you have the ability to provide the relevant documents we have requested for use in the litigation and if the information exists and is in your possession or control).  Devon Fund’s lawyers have confirmed their instructions are that Devon Funds does not have right to inspect your computer systems and it intended to refer your request directly to you.

Our   instructions   are   that   Macquarie   undertakes   to   meet   those reasonable expenses, and your estimate of what they will likely total is helpful, thank you.

...

[6]      On the face of the advice, it appears that the undertaking was given by the third defendant, Macquarie New Zealand Ltd, though it has since been treated as the plaintiffs’ collective undertaking in their solicitors’ correspondence and in submissions.  I proceed on that basis.

[7]      On 1 November 2010 the plaintiffs served the application on Goldman Sachs, having  given  prior  advice  of  the  filing  on  the  day  that  step  was  taken.    The application had a first call date of 4 November, and the plaintiffs proceeded on the basis that that the application would likely not need to be heard and that orders would not be required. The plaintiffs’ solicitors had advised Goldman Sachs accordingly. On 2 November Goldman Sachs requested the plaintiffs to confirm that the undertaking extended to all additional attendances required in respect of the application. The following day the plaintiffs’ solicitors advised that there was no such extension and that the logical time to negotiate what other costs might be reimbursed was once Goldman Sachs had identified whether the required documentation was retrievable.

[8]      On  4  November  2010  the  application  was  adjourned.  That  same  day, Goldman Sachs’ solicitors confirmed the outcome of the two tasks to which the undertaking applied:

6.Our client has now taken steps to ascertain whether there is any justification for the plaintiffs’ speculation that documentary evidence exists in its possession, power or control. We can advise that:

(a)       All  computers,  laptops  and  workstations  used  by  Devon Funds or Mr Glass were set up on a ‘virtual server’ during the transition to new ownership.

(b)       Upon completion of the sale, all information belonging to Devon Funds was provided to Devon Funds.   The virtual server was decommissioned shortly thereafter and the information on it was deleted and is no longer accessible on Goldman Sachs’ servers.

(c)       All  computers,  laptops  and  workstations  used  by  Devon Funds or Mr Glass were also decommissioned shortly after the transition period (being 30 June 2010).  As part of this process, the hard drives were wiped and the workstations were reimaged with the GS Image.  The computers, laptops, and workstations have since been redeployed and are currently used by GS staff in the ordinary course of its business.

7.        This can be confirmed and verified by GS’ IT personnel (by way of a

sworn affidavit) if required.

[9]      Not content with the solicitors’ advice, the plaintiffs’ solicitors suggested that the plaintiffs’ expert forensic IT advisers (Deloitte) have direct discussions with Goldman Sachs’ IT personnel. Goldman Sachs rejected the suggestion, and though it had offered to confirm by affidavit that documents created by Mr Glass could no longer be retrieved, it subsequently declined to provide an affidavit.  The reason, it seems,  was  a  reluctance  to  incur  further  unmet  costs.    In  the  interim  (on  12

November) Goldman Sachs had invoiced the plaintiffs for the work (internal and external) that it said it had done to complete the tasks that the undertaking covered. The invoice was for a sum that was significantly in excess of the estimate that had been given.   Goldman Sachs’ executive director advised what the reason for that was:

We initially estimated those enquiries might cost between $2,000-$3,000 (excluding GST if any) however the enquiries required more extensive input from our IT people than we originally envisaged due to the decommissioning exercises that occurred.

[10]     On 12 November 2012 Goldman Sachs had sent a further invoice. It covered attendances that it says were incidental to the application.

[11]     The plaintiffs continued to press their request to have Deloitte undertake an inspection which was declined.   The result was that on 30 November 2010 the plaintiffs advised that they were likely to withdraw their application.   They also asked that Goldman Sachs preserve any relevant documents in its possession but not take further steps in relation to their enquiries. They advised that they would honour their undertaking but requested documentation to justify the reasonableness of all the costs claimed.

[12]     Goldman Sachs provided the hours, hourly rates for staff that had undertaken work and a brief description of the nature of the work. It declined to provide a full description of the work including the dates that it was undertaken.   It expressed reservations about providing a full description as there was a risk that privilege would be waived, which risk counsel for the plaintiffs acknowledges.

[13]     With  respect  to  the  work  covered  by  the  undertaking,  Goldman  Sachs’ position was that its entitlement to recover actual costs was not subject to any cap and  that  the  work  was  necessary.    With  respect  to  the  work  relating  to  the application, its position was that it was entitled to full reimbursement as it was left with no option but to take steps to fully understand the application.  For that purpose it was necessary to assess the IT implications and merits of the application.

[14]     The plaintiffs withdrew the application on 2 December 2012 approximately one month after it was filed.   The parties continued their efforts to resolve their dispute over the invoices, unsuccessfully. The plaintiffs say that Goldman Sachs has refused to provide supporting information to justify the reasonableness of the costs claimed in the invoices. Goldman Sachs says it has provided all information that it could reasonably be required to provide.

[15]     At a case management conference on 17 August 2011 I made directions that:

[1]      This minute deals with the outstanding issue as to costs between the plaintiffs and the non-party, Goodman Sachs.  The parties are agreed

Goodman Sachs is entitled to its reasonable costs on the non-party application. There is a dispute as to the amount that is reasonable.

[2]      After discussion with counsel for the plaintiffs and for the non-party

I direct by consent as follows:

(a)       The plaintiff is to pay by 24 August 2011 (5 working days) the amount it contends is reasonable in respect of the non- party application for discovery;

(b)       If issues remain as to the adequacy of that sum, the non- party is to file and serve a memorandum seeking a further sum and the grounds on which it relies for the contention that the overall sum represents its reasonable costs – by 31

August 2011;

(c)      The  defendant  is  to  file  and  serve  a  memorandum  by  7

September 2011 setting out its grounds for opposition (if any);

(d)       The memoranda are to be supported in each case by brief affidavits;

(e)       Costs on the costs application should be addressed in the memoranda.   I record that counsel are agreed in principle that costs on the memoranda and today’s appearance should be awarded to the successful party on a 2B basis.

[3]       If there are outstanding issues of cost outside the scope of the non- party application then these should also be dealt with in the memoranda.

[16]     Subsequently, the plaintiffs paid $3,000 towards the first invoice and $3,102 towards the second.

Orders Sought

[17]     Goldman Sachs’ claims are for the following:

(a)      Its first invoice, issued pursuant to the undertaking, for internal and external costs of $11,705.85 including GST (less the $3,000 already received);

(b)Its second invoice for internal and external costs incurred in dealing with the application up to and including the date the application was

withdrawn  in  the  sum  of  $27,691.23  including  GST  (less  $3,102 already received); and

(c)       A  contribution   to   its   further   legal   costs   incurred   in   seeking reimbursement of the above costs, in the sum of $3,760.

[18]     The plaintiffs seek an order adjusting the costs to the $3,000 paid by them. Pursuant to the undertaking, counsel for the plaintiffs submits that at best costs of

$400 plus GST for IT personnel have been proved.

[19]     I begin with the costs claimed pursuant to the undertaking.

The Undertaking

[20]     The issue for determination is what costs Goldman Sachs is entitled to be indemnified for in respect of the work undertaken to complete the two tasks that were the subject of the undertaking of 10 November.  Goldman Sachs relies on its contractual entitlement under the undertaking to recover from the plaintiffs, on a full indemnity basis, the costs it incurred in undertaking that work.

[21]     It is not in dispute that what both sides intended was for Goldman Sachs to be reimbursed for its actual costs of undertaking the work which could encompass IT advice, and both internal and external legal advice.

[22]     However, contrary to Goldman Sachs’ contention, the plaintiffs submit that the undertaking was expressly limited so as to cover such costs or expenses to the extent that they are reasonable.  Counsel for the plaintiffs also submits that the fact the estimate was exceeded several times over is indicative of Goldman Sachs’ failure to satisfy the requirement as to reasonableness.

[23]     I accept, as counsel for the plaintiffs submits, that the undertaking was not open ended.  The express wording of the undertaking entitled Goldman Sachs to its reasonable costs. That notion of reasonableness is reflected in the terms of High Court rule 14.6(4)(d) which deals expressly with the Court’s discretion to order costs

in favour of a non-party who has acted reasonably in relation to the proceeding. The rule states:

(4) The Court may order a party to pay indemnity costs if -

...

(d)      The person in whose favour the order for costs is made was not a party to the proceeding and has acted reasonably in relation to it;

...

[24]     Though not strictly applicable to non-parties, r 14.6(4)(e) also embodies the requirement of reasonableness. If applied where a party to the proceeding claims costs pursuant to an entitlement to indemnity costs under a contract.[2]

[2] McGechan on Procedure deals with this issue at HR48C.01(13) and states:

The Court will always look closely at the wording of the contract or deed to see whether it gives an entitlement to indemnity costs.

[25]     I am therefore unable to accept counsel for Goldman Sachs’ submission to the effect that the work that was undertaken is not to be measured against any requirement as to reasonableness.

[26]     Further, I am unable to accept that the fact that the estimate was exceeded does not affect the entitlement to costs under the undertaking and is not a matter going to the Court’s discretion.  Counsel argues that because the plaintiffs did not indicate that they would not require Goldman Sachs to undertake the work if it was more extensive than originally anticipated, or if the indicative costs estimate was exceeded,  there  can  be  no  complaint  about  the  actual  cost  even  though  it  far exceeded  the  estimate.     All  indications,  she  contends,  were  that  it  was  of considerable importance to ascertain the existence or otherwise of the required documents.

[27]     I can readily accept the contention that Goldman Sachs understood that it was important to the plaintiffs to establish whether it had in its possession the documents

the plaintiffs sought. The same can be said of Goldman Sachs’ contention that the

work required was much more extensive than originally anticipated as the relevant computer systems had been decommissioned prior to the plaintiffs’ requests.

[28]     However, Goldman Sachs had given an estimate that it knew the plaintiffs had found “helpful”.   The estimate of $2,000 - $3,000 was, as counsel for the plaintiff submits, a guide to the likely extent of the costs that would be incurred. Goldman Sachs realised that the estimate was hopelessly wrong as it omitted to account for the very decommissioning that led to the increased costs.   Materially, Goldman Sachs’ own case is that the decommissioning had occurred prior to its giving the estimate.  It cannot have been long before the problem was recognised. The omission, once realised, ought to have indicated to a reasonably prudent non- party  that  it  should  not  simply  go  ahead  without  revising  the  estimate.  The reasonable course would have been to warn the plaintiffs of the significantly greater costs that were inevitable because the decommissioning necessitated much more extensive work.

[29]     Having said that however, I do not think that the failure to discuss a revised estimate precludes Goldman Sachs being permitted some proper recompense.  I do not accept the submission that Goldman Sachs has failed to lay a sufficient evidential foundation to show that it cannot reasonably expect anything over and above the costs of the IT consultant. An estimate is not of the same nature as a quote.  It would have been in the reasonable contemplation of the plaintiffs that the upper figure of

$3,000 might be exceeded as the full extent of the tasks could not have been accurately predicted.

[30]     The plaintiffs’ initial response to Goldman Sachs’ invoice for the sum of

$11,705.85 (including GST) is instructive.   The correspondence clarifies that the dispute about the reasonableness of the invoice was originally threefold:

(a)      First, the plaintiffs took issue with the internal costs of $8,800 (before GST).   That figure includes 3 hours of time charged by the Chief Executive at $1800 per hour, with the rate of $1800 said to be calculated at market consultancy rates. The plaintiffs submit that this part of the costs’ claim has never been adequately explained.   They

say it was impossible to make an assessment as to whether the work was reasonably necessary or whether the hourly rate could be viewed as reasonable.

(b)Secondly, while they accepted that the balance of the internal costs reflected a reasonable amount of time for in-house counsel and IT personnel, they challenged the reasonableness of the hourly rates of

$600 per hour for the former.

(c)      Thirdly, they challenged the claim of $1,379 plus GST for external legal costs at hourly rates of $585 and $275.

[31]     The plaintiffs’ position has subsequently hardened somewhat. In submissions counsel  for  the  plaintiffs  argues  that  it  is  not  enough  that  Goldman  Sachs  has indicated the time expended by, and the hourly rates for, the individuals who undertook the work. It is obliged to give a full description of the tasks undertaken and the dates applicable to each task. The only concession that is made is a grudging exception in relation to the claim for the IT consultant.

[32]     I accept that there is substance to the first point.   The input of the Chief Executive could not have been contemplated when Goldman Sachs gave its estimate of $2,000 - $3,000.  Had it been contemplated, Goldman Sachs would have realised that the Chief Executive’s hourly rate of $1,800 would consume the estimate without any input from IT or internal and external legal advisors.   The estimate did not sufficiently allow for the possibility of the Chief Executive’s contribution. A reasonably prudent non-party would have discussed a revised estimate once it had transpired that the work required input from the Chief Executive.

[33]      I am satisfied on this basis that the claim for the Chief Executive’s work should be disallowed.  It is unnecessary given this finding to deal with whether the work has been adequately described.

[34]     With respect to the second and third submissions, I do not see any merit in

the plaintiffs’ contentions.   The tenor of  the  correspondence  indicates  that  they

accepted that it was reasonable for Goldman Sachs to require the input of internal and external counsel to fulfil the tasks related to the undertaking. That was entirely appropriate.  I do not accept that the time claimed for was unreasonable. Nor do I see any real issue as to the hourly rates.  While those rates are somewhat high, they are not so high as to lead me to conclude that they are not commensurate with the rates of senior executives in large international commercial entities and senior members of a large commercial law firm. I am also satisfied that Goldman Sachs provided a sufficient description of the work.

[35]     The result is that:

(a)       I allow the claim for $11,705.85 including GST, save for a deduction from that amount for the three hours claimed for the Chief Executive’s work at $1800 per hour ($5400).

(b)The plaintiffs are therefore to pay to Goldman Sachs $3305.85 in addition to the sum of $3000 already paid.

The Application Costs

[36]     Goldman Sachs seeks to recover its actual costs associated with the plaintiffs’ abandoned application for inspection, or at least a reasonable contribution towards those costs.

[37]    Counsel for Goldman Sachs submits that the plaintiffs’ application for inspection, made under r 9.34, attracts the same entitlement to costs as in the case of non-party discovery.  Counsel relies on McGechan on Procedure which states that in situations when non-parties are likely to be put to expense, “the Courts will probably follow the practice of requiring them to be indemnified, as in the case of discovery”.[3]

[3] McGechan on Procedure at HR 9.34.07.

[38]     High Court rule 8.22 records the Court’s general discretion in relation to costs

on an application for non-party discovery.  McGechan on Procedure states:[4]

As far as the costs of the application... are concerned, the Court’s general discretion as to costs applies.  In making the order, the Court will take into account the motivation for opposing the application, whether the opposition was reasonable, and the extent of success achieved: Clear Communications Limited v Telecom Corp of New Zealand NZ Limited (1994) 8 PRNZ 200.

[4] At HR 8.22.02

[39]     Counsel also relied on the decision of Hansen J in Commerce Commission v Cards NZ Limited.[5] In that decision His Honour awarded costs of $88,173 to Diners on  an  indemnity basis,  $110,000  to American  Express  by way  of  a  significant contribution towards its actual costs and also allowed the non-parties’ own internal costs.

[5] Commission v Cards NZ Limited (HC) Auckland, CIV2006-484-2535, 10 December 2009.

[40]     His Honour found that:[6]

[6] At [13].

(a)      The potential ramifications of the application for discovery for the non-parties were unusually significant;

(b)      The documents sought were wide ranging;

(c)      Major issues of commercial confidentiality arose; and

(d)The non-parties’ concerns about the risk of disclosure were therefore entirely understandable. It was proper that they took all reasonable steps to ensure that their interests would not be harmed.

[41]     On  this  aspect  I take  as  the  relevant  starting  point  r  14.6(4)(d)  and  the discretion that it affords the Court to order a party to pay indemnity costs if:

The person in whose favour the order for costs is made was not a party to the proceeding and has acted reasonably in relation to it.

[42]     To  my  mind,  Goldman  Sachs’  application  for  indemnity  costs  is  well founded.  When the plaintiffs made their application, Goldman Sachs was entitled to take legal advice on the application and to take reasonable steps to determine what its response to the application would be.

[43]     Counsel for the plaintiffs submits that the steps taken with a view to opposing the application were premature, “gold plated” and unreasonable.   Goldman Sachs should have attached more weight to the plaintiffs’ advice that they had filed the application to comply with the Court’s timetable and hoped that the matter could be resolved and the application withdrawn.

[44]     I do not accept that submission.  The application for inspection had its first call a matter of a few days after it was served.  It was far reaching and ill-defined.  It was underpinned by the plaintiffs’ ill-defined objective of locating documents described as “relevant” without any reference to what issues they were said to be relevant to.  For that purpose the plaintiffs wanted to have Deloitte, a competitor of Goldman Sachs,  undertake a wide  ranging search  of Goldman Sachs’ computer system.  The orders that they sought contemplated inspection of that system on the suspicion that documents created by Mr Glass,  whatever their nature,  might be retrieved for inspection.   This despite the advice given on 4 November as to the decommissioning that had occurred.  Such orders would be oppressive and Goldman Sachs  was  entitled  to  be  concerned  that  they  would  result  in  a  burden  out  of

proportion to the potential benefit to the applicants.[7]

Quantum

[7] As was the case in the Commission v Cards NZ Limited (HC) Auckland, CIV2006-484-2535, 10

December 2009.

[45]     Counsel  for  the  plaintiffs  argues  that  the  lack  of  particulars  makes  it impossible and  inappropriate for the Court  to  attempt  to  determine quantum  of indemnity costs.   I am unable to accept counsel for the plaintiffs’ submission that there  are  insufficient  particulars  given  of  the  attendances  for  which  costs  are claimed.

[46]     I prefer to follow the reasoning of Hansen J in Commerce Commission v Cards NZ Limited.   The situation faced by Goldman Sachs indicated that it was appropriate for it to take all reasonable steps to ensure that its interests would not be harmed. That included satisfying itself as to the nature of the orders that were sought

and its serious concerns about confidentiality and the effect inspection may have on

the integrity of its computer system, if such orders were made.   It was entitled to assess what such orders would entail, and whether it had proper grounds to resist them. I am satisfied that its concerns about the risks of inspection and its uncertainty as to whether or not it should submit are, to use the words of Hansen J, “entirely understandable”.

[47]     The solicitors for Goldman Sachs have provided copies of invoices giving a general outline of attendances and the time expended by each lawyer who worked on the matter.  The average hourly rate charged by the lawyers has been provided, as have the hours and rates charged by Goldman Sachs’ senior officers and staff.

[48]     I  find,  just  as  Hansen  J  found,  that  the  time  spent  by  the  solicitors  is reasonable  having  regard  to  the  factors  I  have  mentioned.    There  is  the  same criticism of the hourly rates charged as made in relation to the work covered by the undertaking but I have already set out why I do not accept that criticism.  The same applies to the hours and hourly rates of the costs of the senior officers and staff.  The rates are high but not disproportionately so.  They are consistent with those approved in Commerce Commission v Cards NZ Limited.  I have no reason to question either the hours expended or the rates charged.

[49]     For these reasons I see no justification not to order that costs be paid on an indemnity basis in terms of r 4.6(4)(d) and I allow this part of the claim.

[50]     The result is that:

(a)       I allow the claim for $27,691.43 including GST.

(b)The plaintiffs are therefore to pay to Goldman Sachs $24,589.43 in addition to the sum of $3102 already paid.

Outcome

[51]     The non-party’s application for costs in relation to the undertaking and the abandoned  application  is  allowed  to  the  extent  that  the  plaintiffs  are  to  pay to Goldman Sachs:

(a)       $3305.85 in addition to the sum of $3000 already paid pursuant to the undertaking; and

(b)$24,589.43 in addition to the sum of $3102 already paid for indemnity costs.

[52]     That leaves only the issue of costs on the application for costs.  There is a suggestion made on behalf of the plaintiffs that any award be deferred.  However I see no reason for this. As recorded in my minute of 17 August 2011, it was agreed in principle that such costs should be awarded on a 2B basis. If there is any issue about

the calculation, brief memoranda may be filed and referred to me within 14 days.

Associate Judge Sargisson