Churchill Group Holdings Limited v Aral Property Holdings Limited HC Auckland CIV 2001 404 2302
[2009] NZHC 2605
•22 December 2009
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2001 404 2302
BETWEEN CHURCHILL GROUP HOLDINGS LIMITED
First Plaintiff
ANDCACHINAL INVESTMENTS LIMITED Second Plaintiff
ANDMATAM INVESTMENTS LIMITED Third Plaintiff
ANDCLEVELAND INVESTMENTS LIMITED Fourth Plaintiff
ANDARAL PROPERTY HOLDINGS LIMITED
First Defendant
ANDDAVID LEUNG Second Defendant
Hearing: 23, 24, 25, 26, 27 and 30 March 2009
Counsel: No appearance for plaintiffs
J G Miles QC and Josh McBride for defendants
Philip Fava in person
Rachel Scott and Andrea Challis
(observing for Mr Yee and Murdoch Price) on 23 and 24 March 2009
No appearance for Mr T Thomas
Judgment: 22 December 2009 at 3:00pm
RESERVED JUDGMENT OF HUGH WILLIAMS J
This judgment was delivered by The Hon. Justice Hugh Williams on
22 December 2009 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules
……………………………………………..
Registrar/Deputy Registrar
CHURCHILL V ARAL AND LEUNG HC AK CIV 2001 404 2302 22 December 2009
AThe defendants are entitled to an order for increased or indemnity costs against the plaintiffs jointly and Mr Fava severally which are fixed in the sum of $2m.
BThe sum lodged by the plaintiffs for security for the defendants’ costs and interest accrued thereon (currently about $115,000) is to be paid by the Registrar to the defendants’ solicitors in partial satisfaction of Order A.
CThe $300,000 received from Mr Thomas is to be taken in partial satisfaction of Order A.
D Any enforcement action must give credit for receipt of the sums in B and
C.
EWithin 42 days from delivery of this judgment the defendants are to advise if they intend to continue to seek an order for increased or indemnity costs against Mr Yee and Murdoch Price. If they do, a conference will be convened to make timetable arrangements concerning that matter.
TABLE OF CONTENTS
Paragraph
Issues [1] Introduction [2] Post-December 2006 events, this hearing
and procedural matters [10] Jurisdiction and the Law [21] Facts prior to October 1998 meetings:
(1) General [30]
(2) Jet Set Centre [35] (3) Joint Venture Agreement [38] (4) 22 February 1998 [45] (5) April-October 1998 [49]
Singapore meetings: 12-16 October 1998:
(1) General and Pleadings [57]
(2) Plaintiffs’ Evidence [62]
(3) Defendants’ Evidence [74] Between October 1998 and April/May 1999 meetings:
(1) Pleadings [84]
(2) 16 October 1998-21 March 1999 [85] (3) 21 March 1999 letter [93] (4) 21 March 1999-10 April 1999 [104] (5) Mr Noel Fava’s enforcement [117]
10 April 1999 meeting
(1) Pleading [127] (2) Plaintiffs’ evidence [129] (3) Defendants’ evidence [164] Events after 10 April 1999 [176] Submissions:
Defendants
(i) General [215] (ii) Interlocutory Applications [230] (iii)“Zero” answer [238] (iv) Mr Fava [245] (v) Defendants’ Submissions in reply [278] Discussion and Decision
(1) Introduction [279]
(2) Witnesses: [281] (a) General [281] (b) Mr Fava [284] (c) Mr Harris [299] (d) Mr Chong [307] (e) Mr Leung [320] (f) Summary of views on witnesses [330]
(3) Views on Facts [334]
(4) Views on Interlocutory applications
(a) General [370] (b) Liquidations and Anton Piller Orders [372] (c) Mr Chong’s evidence and Mr Simpson’s objections
(i) Mr Chong’s evidence [388] (ii) Defendants’ submissions in reply [406] (iii) Discussion [412] (iv) Mr Simpson’s response [418] (v) Discussion [422]
(d) Damages [451]
Crux: Costs application [457]
(1) Mr Fava’s (amendment the Plaintiffs’) Opposition:
r 14.7(g) [458] (2) Rules 14.6 and 14.7 [479] (3) Conclusions [492]
Result [504]
Issues
[1] This judgment deals with an application by the defendants, Aral Property Holdings and Mr Leung, for increased or indemnity costs against the plaintiffs, Churchill, Cachinal, Matam and Cleveland, their former director Mr Philip Fava, and Mr Fava’s solicitor and accountant, Messrs Yee and Thomas (“the costs application”).
Introduction
[2] The claim began in 2001. By the time the substantive hearing began on
25 October 2006 the plaintiffs’ first claim was for more than $25m against both defendants for what was essentially loss of opportunity for them to buy Aral’s share of a shopping centre at Whangaparaoa in North Shore City known as Pacific Plaza. That claim alleged breach of the Fair Trading Act 1986.
[3] In a second cause of action against both defendants in deceit, all plaintiffs (though the losses were alleged only to have been incurred by Churchill, Matam and Cleveland) sought the same damages plus exemplary damages of $25m.
[4] As the litigation proceeded through its multiple interlocutory phases and through trial to the point where judgment was entered, it became, on any measure, very detailed and complex. It covered a huge spectrum of detail, many thousands of pages of documents and thousands of pages of evidence. Of the four main witnesses, Mr Fava’s evidence-in-chief was 355 pages in extent with cross-examination extending over 451 pages of transcript; the briefs of the plaintiffs’ two other main witnesses, Messrs Harris and Chong, were 52 and 40 pages respectively, with 145 and 153 transcript pages of respective cross-examination and Mr Leung’s brief extended over 224 pages followed by 188 pages of cross-examination. The plaintiffs called 14 witnesses other than Messrs Fava, Harris and Chong – one by videolink – and their evidence and cross-examination was also extensive. And Mr Ronald of Hong Kong Shanghai Banking Corporation (“HSBC”) had just finished reading his
69 page brief of evidence for the defendants when the hearing ended. The principal documents were assembled into two series of Eastlight folders, nearly 19,000 pages
in one 33 volume series and nearly 5,500 pages in another 12 volumes. Additionally, there were 21 volumes comprising 68 affidavits filed during interlocutory stages of the claim, another five Eastlight folders relating to the dispute between Mr Philip Fava and a brother, Mr Noel Fava. Another 11 Eastlight files contained miscellaneous ancillary documents.
[5] The substantive trial began with further interlocutory applications but, by
13 December 2006, Day 31, the hearing was well on the way to completion. Extensive evidence of all four main witnesses had been given, the plaintiffs’ case was complete, and the defendants’ case was within what would probably have been a day or so of completion.
[6] However, on 13 December 2006 the case came to an abrupt halt and judgment under the then r 485 was entered for both defendants against all plaintiffs on the basis that the plaintiffs were not, in formal terms, “appearing”.
[7] The reason? On 6 December 2006 Mr Fava withdrew his opposition to an order of adjudication in bankruptcy based on his inability to meet a debt of some
$7,000. In 2007 he characterized that as a “bad judgment call” stemming from his collapse through exhaustion from the strain of this case.
[8] As a result of adjudication he was automatically disqualified from continuing as director of the plaintiffs and his shares in them passed to the Official Assignee. As a result of that, neither Mr Judd QC, senior counsel for the plaintiffs, nor his instructing solicitors, were able to continue to get instructions. As a result of that, on
13 December 2006 Mr Judd was granted leave to withdraw. As a result of that, the r 485 judgment was entered.
[9] On the third anniversary of his adjudication, 6 December 2009, Mr Fava was automatically discharged from bankruptcy. He immediately set about regaining his shares and directorships in the plaintiffs and, in an affidavit sworn in support of his application for the Court not to deliver this judgment until determination of his appeal, he made clear that as soon as he has completed that exercise the plaintiffs
would appoint solicitors and counsel and apply under r 10.9 to set aside the judgment of 13 December 2006.
Post-December 2006 events, this hearing and procedural matters
[10] However, the matter did not end there.
[11] In meeting this claim the defendants incurred some $3.158m in legal fees and disbursements and because of that, the way in which the litigation had been conducted and having been deprived of a judgment which – they hoped – would vindicate their actions, they were determined to seek redress, principally by the route of applying for increased or indemnity costs.
[12] In early 2007 they applied for such costs against the plaintiffs, Mr Fava personally and Messrs Yee and Thomas in their capacities as mentioned and as trustees of the Philip Joseph Fava No.1 Trust. They also sought increased or indemnity costs against Mr Yee’s legal firm, Murdoch Price, for opposing three interlocutory applications.
[13] That application – amended on 16 December 2008 – took a regrettably long time to come to hearing but, after a further flurry of interlocutory applications were dealt with, it was heard over the 6-day period appearing in the frontispiece. The parties also produced a considerable volume of documentation during the hearing.
[14] This judgment stems from that hearing, but it is important to note that, at the fixture, the defendants only sought judgment against the plaintiffs and Mr Fava. Depending on the result, their application against Messrs Yee and Murdoch Price may require a further hearing. Since the hearing, the claim against Mr Thomas has been settled and discontinued.
[15] The course of dealing with the costs application has not been straightforward in that, during the hearing, the Court dismissed an application by Mr Fava under r 9.75 for leave to issue subpoenas and have witnesses – especially Mr Simpson, a partner in Bell Gully, the defendants’ solicitors - give evidence and produce
documents. After the hearing concluded Mr Fava sought re-call of that judgment. That matter was dealt with in further hearings over the following two months, and a separate judgment was in due course issued dismissing the re-call application. Mr Fava then lodged a notice of appeal against that dismissal. That has made almost no progress towards a fixture and, as noted, on 7 December 2009 Mr Fava applied for an order that delivery of this judgment be delayed until the appeal was heard. That has been dealt with in a separate judgment delivered contemporaneously.
[16] It is also to be noted that, as has been commented on in a number of judgments, the claim has been “characterized since its commencement with allegations of bad faith, misleading and deceptive conduct, deceit and fraud” (judgment of 14 December 2006 para [4]). Mutual and vitriolic pleadings and assertions were commonplace. Parties – especially Mr Fava – did not shrink from repeatedly asserting improper motives by opponents. Assertions of professional misconduct were frequently made. The allegations not infrequently included assertions of criminal conduct such as attempts to pervert the course of justice. Though Mr Fava and his solicitors – and, at times, counsel – were the main source of such assertions, they were not alone.
[17] As a result, the way the parties proceeded on the costs application resulted in a hearing where submissions were somewhat out of kilter with the application. To explain, though nominally aimed at the requirements of rr 14.6 and 14.7, the parties felt free to deal extensively with the whole of the evidence at the substantive hearing and the strengths and weaknesses of the plaintiffs’ and defendants’ cases, notwithstanding that the substantive hearing never concluded and thus was never the subject of full submissions and a reasoned judgment on the merits. Further, because one of the defendants’ principal grounds of the costs application was that the plaintiffs’ case had been without merit and they improperly pursued a hopeless case, and because Mr Fava denied that and alleged the defendants had engaged in improper behaviour of their own, both groups of parties felt fully justified in continuing their assertions of improper, unprofessional, even criminal, conduct on the others’ part.
[18] Despite the thousands of pages of documents and evidence in the case, as has been noted in a number of judgments, the questions at the core of this claim, and critical to the costs application and opposition, are what took place at two series of meetings – in Singapore in October 1998 and in Auckland in March/April 1999 – and, of the four participants, Messrs Fava, Harris, Chong and Leung, who said what to whom and what was agreed at those meetings. In respect of those meetings, there were, surprisingly in view of the way all other aspects of the relationship between the parties were managed, comparatively few documents.
[19] Because the Court’s evaluation as to what took place at those meetings and the credibility and veracity of the participants would have been vital to any judgment on the merits of this case and is also of significant importance in assessing the costs application and Mr Fava’s response, the approach adopted has been to assess the evidence of those four witnesses. As will be seen, cross-examination was of vital importance in assessing merits and is of similar importance in assessing such matters as whether the parties contributed unnecessarily to the time or expense of the claim or whether they may be said to have acted “vexatiously, frivolously, or unnecessarily in commencing, continuing, or defending a proceeding or a step in a proceeding”. Those issues are also relevant to whether there is “some other reason” to refuse or reduce the costs sought by the defendants.
[20] The approach to costs and the broad, complex spectrum of the substantive proceeding (to say nothing of the time elapsed since it occurred) necessitated lengthy re-reading and summarizing almost the whole of the extensive evidence and reference to large numbers of documents as a prelude to and part of the preparation of this judgment. Reflection on that material has led to the view that not all needs to be incorporated or referred to in this judgment: only the more salient issues seem necessary to be covered. As a result the parties – Mr Fava in particular – will take the view some aspects of the evidence and their submissions have been incorrectly excluded or have been occasioned undue or insufficient prominence and, in a judgment of this length, there may well be minor factual errors, but, at the end of the day, the task has been to review the evidence, the documents and the submissions within the confines of rr 14.6 and 14.7 and deal with them accordingly.
Jurisdiction and the Law
[21] Jurisdiction to award increased or indemnity costs is now in r 14.6 (formerly r 48C) which reads:
14.6 Increased costs and indemnity costs
(1) Despite rules 14.2 to 14.5, the court may make an order—
(a) increasing costs otherwise payable under those rules
(increased costs); or
(b)that the costs payable are the actual costs, disbursements, and witness expenses reasonably incurred by a party (indemnity costs).
(2)The court may make the order at any stage of a proceeding and in relation to any step in it.
(3) The court may order a party to pay increased costs if—
(a) the nature of the proceeding or the step in it is such that the time required by the party claiming costs would substantially exceed the time allocated under band C; or
(b)the party opposing costs has contributed unnecessarily to the time or expense of the proceeding or step in it by—
(i) failing to comply with these rules or with a direction of the court; or
(ii) taking or pursuing an unnecessary step or an argument that lacks merit; or
(iii) failing, without reasonable justification, to admit facts, evidence, documents, or accept a legal argument; or
(iv) failing, without reasonable justification, to comply with an order for discovery, a notice for further particulars, a notice for interrogatories, or other similar requirement under these rules; or
(v) failing, without reasonable justification, to accept an offer of settlement whether in the form of an offer under rule 14.10 or some other offer to settle or dispose of the proceeding; or
(c)the proceeding is of general importance to persons other than just the parties and it was reasonably necessary for the party claiming costs to bring it or participate in it in the interests of those affected; or
(d)some other reason exists which justifies the court making an order for increased costs despite the principle that the determination of costs should be predictable and expeditious.
(4) The court may order a party to pay indemnity costs if—
(a)the party has acted vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing, or defending a proceeding or a step in a proceeding; or
(b)the party has ignored or disobeyed an order or direction of the court or breached an undertaking given to the court or another party; or
(c)costs are payable from a fund, the party claiming costs is a necessary party to the proceeding affecting the fund, and the party claiming costs has acted reasonably in the proceeding; or
(d)the person in whose favour the order of costs is made was not a party to the proceeding and has acted reasonably in relation to it; or
(e) the party claiming costs is entitled to indemnity costs under a contract or deed; or
(f) some other reason exists which justifies the court making an order for indemnity costs despite the principle that the determination of costs should be predictable and expeditious.
[22] Mr Fava asserts there are factors affecting the defendants – particularly the actions of Bell Gully and Mr Simpson – which should lead the Court to decline the application, wholly or in part. He rests that opposition on r 14.7(g) which reads:
14.7 Refusal of, or reduction in, costs
Despite rules 14.2 to 14.5, the court may refuse to make an order for costs or may reduce the costs otherwise payable under those rules if –
... (g) some other reason exists which justifies the court refusing costs or reducing costs despite the principle that the determination of costs should be predictable and expeditious.
[23] The principal indemnity costs decisions relied on were those of Three Rivers District Council v Bank of England [2006] EWHC 816 and Bradbury v Westpac Banking Corporation (2008) 18 PRNZ 859, [2009] 3 NZLR 300 (CA).
[24] Mr Miles QC, senior counsel for the defendants, submitted that, with the necessary change in detail, the description by Tomlinson J in Three Rivers in granting an application for indemnity costs could aptly apply to this litigation. The Judge held:
1. On 2 November 2005, Day 256 of the trial, the English liquidators of Bank of Credit and Commerce International SA, “BCCI SA”, the claimants in this action, to whom I shall refer as “the liquidators,” finally abandoned their attempt to prove that in its supervisory regulation of the activities of BCCI SA in the United Kingdom between 1980 and 1991 the Bank of England, “the Bank”, acted in a knowingly unlawful and in important respects wholly dishonest manner.
2. Over the course of twelve years of litigation the Bank, through its officers, was accused by the liquidators of an immense catalogue of outrageous behaviour. ... officials of the Bank were also accused of dishonestly misleading a number of persons and institutions, including even Parliament itself.
...
6. The accusations of dishonesty did not stop there. Officials of the Bank were alleged by the liquidators to have created, on a vast scale, documents which dishonestly misrepresented the position or their contemporary understanding of it so as to create a false and misleading paper trail to cover their tracks. ...
7. By the time that the liquidators’ case had closed after first Mr Gordon Pollock QC and then Lord Neill of Bladen QC had addressed me on their behalf, at least 42 of the Bank’s officials stood accused of dishonesty, a substantial uplift on the 22 identified in the liquidators’ statements of case as having been dishonest. As Mr Nicholas Stadlen QC for the Bank has observed, keeping a tally of those whose names were to be added to the roll of dishonour became during the trial something of a parlour game. That notwithstanding, I do not overlook the distress which must have been caused to those who found themselves publicly accused of dishonesty in this manner, and particularly the distress caused to the families of those who were so accused after their death. Mr Pollock had already conceded before the trial began that the basis for alleging dishonesty against quite a few of the initial 22 officials was slender. It must have been apparent that the more names were added to this list the more implausible the allegations became.
8. Perhaps unsurprisingly given the scale of the Bank’s alleged wrongdoing and turpitude the liquidators in December 2002 added to their statements of case a contention that the Bank should, in addition to paying normal damages and interest, be condemned to pay exemplary damages on the basis that its conduct throughout the entire period with which the claim was concerned was “oppressive, arbitrary and unconstitutional” and was conduct “meriting an award of exemplary damages.”
...
10. I have probably already said enough to indicate that this was extraordinary litigation which came to an abrupt albeit long overdue conclusion in unusual circumstances. ...
11. The liquidators did not withdraw their allegations nor proffer any apology. They can be compelled to do neither and they may not wish to do so. However the position in which the Bank and the impugned officials are left is unsatisfactory, as is likewise the position of the families of those impugned officials who are now dead. ...
[25] In Bradbury a claim for $13.5m plus aggravated and punitive damages shrunk before trial and was, on the seventh day, abandoned. Harrison J discussed the principles applicable to indemnity costs in the following passage (at 862-863 paras [8]-[12]):
Indemnity
(1) Principles
[8] Mr Stephen Kos QC for Westpac submits that indemnity costs should be awarded, being “the actual costs, disbursements and witnesses expenses reasonably incurred”; r 48C(1)(b). He submits that B & M acted “vexatiously, frivolously, improperly, or unnecessarily in commencing or continuing [this] proceeding or a step in the proceeding”; r 48C(4)(a). Messrs Kos and Gedye acknowledge that the threshold is high — both refer to a standard approaching egregious conduct.
[9] The decision in Glaister v Amalgamated Dairies Ltd [2004] 2 NZLR
606; (2004) 16 PRNZ 1047 (CA) gives guidance on the approach to be applied. The starting-point in any assessment is objective, not subjective, and is to be applied by reference to rules and not to actual costs. The integrity of the scale, with its associated value of predictability and certainty, is not to be lightly discarded. Nevertheless, Judges of this Court retain an overriding discretion to depart from the scale and “if satisfied that it is appropriate to do so they ought not to hesitate to resort [to it]”; at para 28. That exercise must, of course, like the exercise of all discretionary powers, be considered and particularised.
[10] The current costs scheme is underpinned by the premise that a successful party should receive a reasonable contribution towards its costs: Glaister, at para 14; see also Elias CJ in Prebble v Huata [2005] 2 NZLR
467; (2005) 17 PRNZ 581 (SC), endorsing this statement by Cooke P in
Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 3 NZLR
457; (1991) 3 PRNZ 571 (CA):
[The costs scheme] reflects a philosophy that litigation is often an uncertain process in which the unsuccessful party has not acted unreasonably and should not be penalised by having to bear the full party-and-party costs of his adversary as well as his own solicitor- and-client costs. If a party has acted unreasonably — for instance by
pursuing a wholly unmeritorious and hopeless claim or defence — a more liberal award may well be made in the discretion of the Judge, but there is no invariable practice. [P 460; P 574] (Emphasis added)
[11] The philosophy underlying the highlighted passage from Cooke P's judgment is now recognised by r 48C. The practical test for determining a claim for indemnity costs remains whether the losing party has pursued a wholly unmeritorious or hopeless case. In Lewis v Cotton [2001] 2 NZLR
21; (2000) 20 FRNZ 86 (CA), at paras 65-72 the Court of Appeal upheld an award of indemnity costs in this Court where it was satisfied a claim “border[ing] on the hopeless” (at para 67) and “indicating a lack of focus on the essential ingredients of [a] claim” (at para 68) fell within the realm of vexatious, querulous, improper or unnecessary conduct in commencing or continuing a proceeding.
[12] It has been said that costs have not been awarded in New Zealand to indemnify successful litigants for actual solicitor and client costs “except in rare cases generally entailing breach of confidence or flagrant misconduct”; Prebble, at para 6. This Court has required proof of exceptional circumstances such as where allegations of fraud are made without foundation; or where proceedings are commenced for an ulterior motive or in wilful disregard of known facts or clearly established law; or where allegations are made that ought never have been made: Hedley v Kiwi Co- operative Dairies Ltd (2002) 16 PRNZ 694 (HC), applying Colgate Palmolive Co v Cussons Pty Ltd (1993) 118 ALR 248, (1993) 46 FCR 225; Paper Reclaim Ltd v Aotearoa International Ltd 22/4/05, Harrison J, HC Auckland CIV-2004-404-4728.
[26] The Court of Appeal in Bradbury v Westpac Banking Corporation [2009]
3 NZLR 400, 409-410 reviewed overseas authority in dismissing the appeal, holding:
[25] This Court in Holdfast NZ Ltd v Selleys Pty Ltd (2005) 17 PRNZ 897 considered the topic of increased costs and at [40]—[42] emphasised the reasons for employing as their starting point the rates set by the Rules Committee rather than the costs charged by counsel for the successful party to their client. The considerations include the risk of disparate approaches due to different judicial experience and perceptions, which is a rule of law point: [11] above.
[26] Although r 48C(4)(a) (now r 14.6(4)(a), governing indemnity costs, employs the adverb “unnecessarily” of the same word “unnecessary” as is used in r 48C(3)(b)(ii) (r 14.6(3)(b)(ii)) dealing with increased costs, their respective contexts differ. The latter is an element of simple unreasonableness; the former of distinctly bad behaviour. As this Court held recently in Saunders v Winton Stock Feed Ltd [2009] NZCA 148, “unnecessarily” in r 48C(4)(a) takes its meaning and flavour from the adverbs which precede it: “vexatiously, frivolously, improperly”.
[27] The distinction among our three broad approaches: standard scale costs;
increased costs; and indemnity costs may be summarised broadly:
(a)standard scale applies by default where cause is not shown to depart from it;
(b)increased costs may be ordered where there is failure by the paying party to act reasonably; and
(c)indemnity costs may be ordered where that party has behaved either badly or very unreasonably.
[28] ... the starting point of our rules, which gives a one-third or thereabouts deduction from a set figure is comfortably in the modern main stream. It affords recognition of the access to justice factor that prevails in the United States and should not lightly be departed from. Clear cause must be shown to justify an increase. Our three stage classification, with a discretion in each class as to where the order should be pitched, accords with that approach. Indemnity costs, which depart from the predictability of the Rules Committee's regime, are exceptional and require exceptionally bad behaviour. That is why to justify an order for such costs the misconduct must be “flagrant”: Prebble v Awatere Huata (No 2) [2005] 2 NZLR 467 at [6] (SC).
[29] We therefore endorse Goddard J's adoption in Hedley v Kiwi Co- Operative Dairies Ltd (2002) 16 PRNZ 694 at [11] (HC) of Sheppard J's summary in Colgate v Cussons at [24]. While recognising that the categories in respect of which the discretion may be exercised are not closed (see r 14.6(4)(f)), it listed the following circumstances in which indemnity costs have been ordered:
(a) the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud;
(b)particular misconduct that causes loss of time to the court and to other parties;
(c)commencing or continuing proceedings for some ulterior motive;
(d)doing so in wilful disregard of known facts or clearly established law;
(e) making allegations which ought never to have been made or unduly prolonging a case by groundless contentions, summarised in French J's “hopeless case” test. [in J Corp Pty Ltd v Australian Builders Labourers Federation Union of Workers (WÄ Branch) (No 2) (1993) 46 IR 301 at 303.
[27] As noted, the defendants seek increased or indemnity costs against Mr Fava, even though he was a non-party. He was sole director of the plaintiffs at most material times and the driving force behind the litigation. Mr Miles submitted he and his interests would have been the prime beneficiaries had it run its full course and the plaintiffs been successful. He submitted Mr Fava manipulated much of the evidence. The defendants relied on the jurisdiction to order costs against a non-party
as set out in Asset Building M Pritchard Limited v Hambeg Limited (HC AK CIV-
2008-404-3781, 21 November 2008, Asher J):
[9] The jurisdiction to order costs against a non-party was first recognised in New Zealand in Carborundum Abrasives Ltd v Bank of New Zealand (No 2) [1992] 3 NZLR 757, and confirmed by the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2005] 1 NZLR 145. The reason for the development of the jurisdiction was summarised by Tompkins J in Carborundum at 765, quoted in Dymocks Franchise Systems at 156:
Where proceedings are initiated and controlled by a person who, although not a party to the proceedings, has a direct personal financial interest in their result, such as a receiver or manager appointed by a secured creditor, a substantial unsecured creditor or a substantial shareholder, it would rarely be just for such a person pursuing his own interests, to be able to do so with no risk to himself should the proceedings fail or be discontinued. That will be so whether or not the person is acting improperly or fraudulently.
[10] The Privy Council described costs orders against non-parties as “exceptional”, in that context meaning “no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense”: at [25](1). The jurisdiction is in the end fact specific. It will not be exercised against pure funders, but where a party does not merely fund the proceedings but substantially controls them and is to benefit from them, justice will ordinarily require that if the proceedings fail that non-party will pay the successful party’s costs. As was stated in Dymocks Franchise Systems at [23](3):
The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes. He himself is “the real party” to the litigation.
[11] The Privy Council discussed the specific position of non-party directors and liquidators of party companies at [29]:
In the light of these authorities their Lordships would hold that generally speaking, where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs if his claim or defence or appeal fails. As explained in the cases, however, that is not to say that orders will invariably be made in such cases, particularly, say, where the non-party is himself a director or liquidator who can realistically be regarded as acting rather in the interests of the company (and more especially its shareholders and creditors) than in his own interests.
[12] The Privy Council quoted with apparent approval at [28] the cautionary statement of Millett LJ in Metalloy Supplies Limited (In liquidation) v MA (UK) Limited [1997] 1 All ER 418 (CA):
It is not, however, sufficient to render a director liable for costs that he was a director of the company and caused it to bring or defend
proceedings which he funded and which ultimately failed. Where such proceedings were brought bona fide to the benefit of the company, the company is the real plaintiff. If in such a case an order for costs could be made against a director in the absence of some impropriety or bad faith on his part, the doctrine of the separate liability of the company would be eroded and the principle that such order should be exceptional would be nullified.
[13] It is therefore clear that costs will not be ordered against a non-party director or a liquidator who can realistically be regarded as acting in the interests of the company rather than his or her own interests. The non-party must have promoted and funded the proceedings by an insolvent company solely or substantially for that non-party’s own financial benefit.
...
[16] While a wide range of matters may be relevant to the exercise of the discretion, the following features can be usefully considered in this case:
a) Whether the unsuccessful party is liable for costs;
b) Whether the non-party controlled the litigation;
c) Whether the non-party stood to benefit from the outcome of the litigation;
d) The merits of the litigation under the control or influence of the non-party; and
e) The procedural steps taken under the control or influence of the non-party.
[28] Mr Miles submitted the claim for costs against Mr Fava personally satisfied those requirements, and indeed his lengthy affidavits and many exhibits which he filed both generally and in relation to this application underlined his status as the “alter ego” of the plaintiffs.
[29] He particularly relied on Mr Fava’s affidavit sworn on 16 July 2004, saying:
9. In late 2002 I assembled the plaintiff’s case for Anton Piller and Preservation Orders in this litigation. I drafted all the relevant court documents. The applications were granted. No steps were taken to set the orders aside. The orders secured documents of considerable benefit to the plaintiff.
10. In late 2002/early 2003 I assembled the plaintiff’s case in opposition to the defendants interlocutory applications in this litigation argued in June
2003. I drafted the reply affidavits of Mr Harris and myself. I researched matters for counsel and assisted counsel extensively prior to/throughout the hearing. I drafted counsel’s submissions submitted after the hearing.
Facts prior to October 1998 meetings:
(1) General:
[30] Mr Fava was, at all material times director of some of the plaintiffs. Mr Harris was Cachinal’s sole director for much of the material period. Messrs Leung and Chong were, at all times relevant to this claim, employees of Aral, though indirectly.
[31] Aral was a property investor incorporated in the early 1990s in the British Virgin Islands. It owns valuable commercial and retail buildings in New Zealand. Mr Leung was not a director, shareholder or employee of Aral but was managing director of the ASO Group which managed Aral’s New Zealand portfolio through ASO Property Management (NZ) Ltd. Mr Leung said his role for Aral was to identify appropriate investments, negotiate terms and then make a presentation to Aral’s board which had to approve any transaction prior to entry into binding agreements. He said Aral and ASO seldom invest in properties not fully developed and tenanted. Even where they do, they invest only where full tenancy is imminent or rental guarantees obtained.
[32] Mr Leung relied on local advisers and Aral employees to supervise its investments, including a number in New Zealand. Its New Zealand advisers were principally BDO Spicers and Bell Gully. He said:
53.“Our relationships with our advisers are based on confidence, honesty, understanding and respect. While I am cost-conscious, I am also aware of the importance of looking after these relationships. A business relationship is like a marriage. There will be good times and bad times. Everyone should be committed to working through the bad times. You cannot walk away from someone at the first sign of difficulty or trouble. You need to work together and help each other. This is how I like to do business.”
[33] ASO is ultimately owned by, and acts as agent for, the owners of World Wide Shipping, the Sohmen family. The founder of World Wide Shipping was a Sir Y K Pao. His eldest daughter married a Dr Sohmen. World Wide diversified into property investment in the early 1990s through ASO Property Services.
[34] Aral’s only bank is HSBC. It has a long-standing relationship with that bank and the bank in its turn has a lengthy relationship with World Wide Shipping. Dr Sohmen was a non-executive director and deputy chairman of HSBC but not a director of Aral or ASO. Mr Leung said the connection means that “I have to be careful when asking the bank to finance an investment” because of the embarrassment that could result if Aral were unable to meet its obligations to HSBC.
(2) Jet Set Centre
[35] Aral commenced investing in New Zealand in 1993, first buying the Jet Set
Centre in Auckland from Churchill.
[36] Aral sold the Jet Set Centre in January 1997 shortly after, according to Mr Fava, Mr Leung told him it had no intention of doing so. Mr Fava was annoyed at the sale as Churchill paid Aral $30,000 not long beforehand to be released from its rent guarantee.
[37] Mr Leung said Aral received an unsolicited offer for the building in October
1996 and sold it at a significant profit. Mr Leung disputed Mr Fava’s assertion that the sale was concealed because Aral wished to settle Churchill’s rental guarantee with a cash payment to Aral before selling. He said Mr Fava’s assertion he was shown a false agreement for sale and purchase was untrue. The sale and purchase agreement contained a confidentiality clause. Mr Fava was critical of Mr Leung and disbelieved his explanation the sale only recently came about.
(3) Joint Venture Agreement
[38] In about March 1996 Mr Fava enquired through Mr Chong whether Aral could be interested in investing in Pacific Plaza.
[39] A 50/50 joint venture was attractive to Aral if due diligence supported the proposal. The purchase price was expected to be about $30m, which would be funded with $5.1m from each party and the balance from the bank. That would give
Aral about its normal 10.5% yield. Aral’s shareholders were interested and ultimately a “Heads of Agreement (non-binding)” (“HoA”) was prepared.
[40] Churchill pleaded that Aral and a nominee incorporated to hold the shares in Pacific Plaza were to enter into an agreement with Churchill to develop land owned by it adjoining Pacific Plaza (the “Superstore” land) and that Aral and Cachinal would each buy half the Superstore from Churchill. Churchill also pleaded that Aral agreed that Churchill could develop land adjacent to Pacific Plaza as an extension to the shopping centre (the “expansion development land” or “ELD”) which Aral and Cachinal would have an option to purchase at market value.
[41] Mr Fava later nominated Cachinal to own Pacific Plaza with Aral under a joint venture agreement dated 14 March 1997. It is noteworthy the agreement said:
4.3The Joint Venturers undertake to act in good faith towards each other and to use all reasonable endeavours to conduct the activities of the Joint Venture in a way which is likely to secure the objectives set out in this clause.
[42] The joint venture agreement contemplated the parties would negotiate together to enter into loan agreements to buy their share in Pacific Plaza. HSBC was Aral’s first choice but others were considered. Mr Leung was not involved in detailed negotiations. He refuted Mr Fava’s assertion he was pressured into accepting HSBC and, even more vigorously, refuted Mr Fava’s assertions that Dr Sohmen was involved in the financing. Mr Leung said Dr Sohmen “never arranged loans for Aral” and described as “absurd” Mr Fava’s suggestion of loss of face if HSBC were not selected as the joint venture financiers. In any event, HSBC’s terms bettered those from other banks.
[43] Settlement of the contract and the purchase of Pacific Plaza occurred on
20 March 1997. On 5 March 1998 Matam contracted to buy the ELD for $1.65m with settlement on 4 October 1998. Matam appointed Churchill as manager of the ELD
[44] Under agreements dated 19 July 1996, Churchill was required to lease all vacant shops in Pacific Plaza so Aral and Cachinal acquired a fully tenanted
shopping centre. Churchill was to be released as lessee once other tenants were found.
(4) 22 February 1998
[45] On 22 February 1998 Messrs Fava and Leung dined at Sails restaurant. Churchill had been in arrears with its rent for some time. Mr Leung raised the issue of the arrears.
[46] There was a divergence of view as to what then took place.
[47] Mr Fava said he told Mr Leung “it was only commerce” and “no one is going to die” if the arrears were not met, at which he said Mr Leung exploded into rage and he, Mr Fava, realised he had caused him to “lose face”.
[48] Mr Leung said Mr Fava was dismissive about paying Churchill’s rental arrears and made the quoted statements but denied in cross-examination that he was affronted or “lost face”. He was just trying to get Mr Fava to agree to Churchill honouring its obligations.
(5) April-October 1998
[49] When pressure was applied to Mr Fava for Churchill to meet its obligations, on 8 April 1988 he wrote to BDO Spicers (who paid Aral’s accounts and in whose premises Aral had its office) complaining payment was being withheld. He said :
We are gravely concerned that BDO have acted unprofessionally here and have perhaps conspired with Aral to perpetrate a deliberate deception upon Churchill.
We regard this matter most seriously. We invite any further submission you may care to make on the matter. We will consider the same upon receipt and to take action as appropriate.
[50] Cross-examined about that, Mr Fava said his employees had promised joint venture creditors they would be paid but BDO withheld payments and as a result:
“They ended up with egg all over their face. They were so brassed off about it they appeared in my office, together, with smoke coming out of their ears and insisted I do something about it. That is what gave rise to this letter”.
[51] Mr Fava said the Churchill arrears were discussed on other occasions about that time with both Messrs Leung and Chong. Those measures and other financial action taken at the time meant, Mr Fava suggested, that by a 13 April 1998 meeting Mr Leung must have known Churchill was under financial pressure. It now appears it was probably insolvent and had been for some time. He said Mr Leung addressed a range of options available to Aral including action to wind up Churchill. But he, Mr Fava, told the meeting that because his interests held debentures over Churchill, liquidation would produce nothing for Aral and Cachinal. Mr Fava told them Churchill could not pay its arrears. Any judgment would be barren. That produced the following exchange in cross-examination (p 102):
Q. Can I put it to you that one of your standard strategies in any of your companies that commits itself to financial obligations is to slip in a debenture to one of your interests?
A. Yes.
Q. The purpose, of course, being that in the event the company can’t pay the obligations that it’s entered into the 1st or 2nd debentureholder will always mop up what assets there are?
A. Yes.
Q. Did you do that with Matam? A. Yes.
Q. You did it with Churchill? A. Yes.
Q. Is that an ethical way of doing business?
A. Absolutely. It is very intelligent. You pay legal advice, and you pay lots of money to lawyers, you structure your business intelligently.
Q. I suppose it enables you to enter into any financial commitment you wish, regardless of whether you can repay it or not, always knowing that your interests are protected under the debenture?
A. No. What it means is that you have your affairs structured carefully.
It is well known that I am a person who structures his affairs very carefully. Had I not structured my affairs carefully I would not have made it as far as getting here today.
[52] At a meeting in Auckland on 13 September 1998 Mr Fava said Mr Chong told them that to proceed with the ELD Aral would need a valuation, 10.5% return for four years, HSBC finance and “prospective tenants for all areas”. Mr Harris and he accepted and all agreed a meeting with Mr Leung in Singapore in mid October was appropriate to move the matter forward.
[53] By 23 September 1998 Mr Fava was proposing the ELD would comprise four floors of offices with four tenancies each, a retail area comprising about
16 tenancies, a department store of 2500m2 which Mr Fava thought he had almost
leased to The Warehouse on a turnover rent, a medical centre or library of about
600m2 below The Warehouse and a carpark underneath. But Pacific Plaza itself still lacked tenants, The Warehouse proposal was promising but they were not secured as an “anchor tenant”. The specialty retail shops were attractive but only if tenants were found. Any library would be slow to occur.
[54] The Warehouse signed an agreement to lease on 8 October 1998 for a turnover-only rent with no minimum. In addition, prior to the mid-October 1998 meetings, Deka continued to show interest.
[55] Those matters led Mr Fava to take the view immediately prior to the Singapore meetings that he was in a very strong commercial position at Pacific Plaza and Aral’s position was very weak because if Aral declined to move on the ELD Mr Fava’s interests would cause a sale notice to be issued by Cachinal and Aral would have to buy Cachinal out. That would have provided Mr Fava’s interests with funds to develop the ELD. That would have “provided me with an opportunity to poach some Pacific Plaza tenants … as soon as Aral had paid out Cachinal for its
50% of Pacific Plaza”. That would diminish Pacific Plaza’s value. All of that, Mr Fava reasoned, would “amount to Aral arming me with the commercial means to do them commercial harm”. But in evidence, Mr Fava refuted the “poaching tenants” comment as being in breach of “my fiduciary obligations as manager of Pacific Plaza”. That was “impossible” and he “absolutely” denied giving any indications on those lines to Mr Harris.
[56] Mr Harris said he was “shocked” at Mr Fava saying his interests might poach tenants from Pacific Plaza. He said he knew by that stage that if there was a conflict between the joint venture and the owners of Pacific Plaza and the adjacent land, Mr Fava would “act however he chose and that would be bad for the joint venture” He, Mr Harris, would then be in an “impossible position” as director of Cachinal.
Singapore meetings: 12-16 October 1998
(1) General and Pleadings
[57] Important meetings took place in Singapore between 12-16 October 1998. The participants were Mr Fava, Mr Leung, Mr Harris and Mr Chong. At the conclusion the parties signed a “Memorandum of Understanding non-legal binding” (“MoU”) which could have led to the acquisition of the ELD by Aral and Cachinal.
[58] The pleading by the plaintiffs was that at those meetings Churchill told the defendants The Warehouse would lease part of the ELD, it had an unconditional offer from Elders to finance the purchase of the expansion land and had resource consents in place for that land. Churchill said it had arranged additional funding to enable Matam to settle the purchase and meet resource management, valuation and professional fees. Churchill pleaded that at the October 1998 meetings, Matam, Cachinal and Aral signed the MoU for acquisition of the ELD from Matam after a market valuation with Aral using its endeavours to obtain finance from HSBC for settlement.
[59] Summarized, the pertinent provisions of the MoU included :
(a)It was headed “Memorandum of Understanding (Non-Legal Binding)” and was for the acquisition of the expansion land by Aral and Cachinal as joint venturers from Matam.
(b)Clause 1 required the joint venturers to appoint a valuer to assess market rental and the value of the expansion land with Matam appointing its own valuer and the valuations “produced by both the valuers shall be used as a reference for negotiation” with cl 2 requiring a net return of 10.5% against purchase price and Matam guaranteeing that return for four years from date of sale (cl 3).
(c)Aral was to approach HSBC on behalf of the joint venturers to use its “best endeavor” [sic] to secure a loan to finance the purchase (cl 4).
(d)Churchill was to retire as manager of the Pacific Plaza and was not to be appointed for the expansion land (cl 5).
(e) The MoU recorded Mr Leung‘s agreement to Mr Chong continuing to “co-ordinate/administrating [sic] all matters pertaining to the operation of Pacific Plaza and the acquisition of the expansion land and report to the JV’s”.
(f) The MoU contained other provisions requiring Aral and Cachinal’s prior consent to expenditure for professional fees, division of costs, postponing preparation of leases and the like.
[60] The plaintiffs further claimed that on 16 October Mr Leung told Mr Fava that:
(a)Once there was a contract in place for sale and purchase of the development there would be no difficulty in arranging finance for construction.
(b) He realised there were significant legal, valuation, architectural fees and other expenses with proceeding with the expansion.
(c)He expected the Plaintiffs and the Defendants would continue to act in good faith.
(d)In particular, in relation to the expansion project, Aral would be able to acquire with Cachinal the expansion project for an amount broadly in line with the valuation advice to be obtained.
[61] Aral pleaded that on 16 October 1998 “Mr Leung stated that he expected Mr Fava and his companies to act in good faith when negotiating the sale price for the expansion development” and that Matam’s contracting to sell the ELD to the joint venture would facilitate its obtaining construction finance.
(2) Plaintiffs’ evidence
[62] Mr Fava’s version of what took place at the Singapore meetings was:
All of us present at these negotiations during October 1998 clearly understood that Matam needed a contract from the Aral/Cachinal JV for the sale and purchase of the completed development at a price that enabled development finance to be arranged. I was confident the valuation mechanism would come out such that a sale and purchase agreement could
be negotiated in good faith with the Aral/Cachinal JV and the development finance could be easily arranged.
At the time the MOU was being signed up Mr Leung specifically said in front of all present that he wanted the sale and purchase agreement negotiated in good faith and he wanted it in place asap so that the whole development could proceed. He specifically said that with the sale and purchase agreement in place construction finance would be easily arranged. We discussed how Matam was to finance the land purchase and initial development costs by way of borrowing from external sources and from Churchill and Mr Leung encouraged me to move ahead with all this.
We also talked about the need for the new premises for The Warehouse to be open by 30 September 1999 as per the Agreement to Lease. We discussed the need for full working drawings so that construction could commence as soon as the Sale and Purchase Agreement was in place. Mr Leung encouraged me to move ahead and get these prepared forthwith.
In essence the talk in my Singapore hotel suite at the time the MOU was being signed up was Mr Leung being upbeat over the expansion and encouraging me to get on and make it all a reality for the benefit of all present. …
Once the MOU was agreed Mr Leung told me to go and tell Deka that the expansion land development would be definitely going ahead anchored by The Warehouse. He told me to tell Deka that Aral and Cachinal would be buying the completed development so that the whole expanded complex was integrated into one.
[63] A second meeting on 14 October 1998 ended after Mr Leung told those present that he had nine points to form the basis of a letter of instruction. Mr Fava’s notes made at the meeting reflect those matters.
[64] Mr Leung’s nine points were tabled at a third meeting on 15 October. They included overall, as opposed to individual, Churchill rental guarantees, joint venture control, the guaranteed income being supplemented by Matam if necessary, division of any excess rental above the 10.5% return on the final price, termination of the guarantee on sale, local body rates, commission, rent holidays and the like being taken into account, and a letter of credit to support the rent guarantee in accordance with a formula Mr Chong put forward. Mr Fava agreed with all those points and Mr Leung said to him “you have to work very fast to fill it [the ELD] up fast”.
[65] Messrs Harris and Chong then drafted the MoU and the parties met again on
16 October. Mr Fava’s evidence included discussion of detail such as where the document was signed and what suit and tie he wore. More importantly, he said
Mr Leung said it was “very important that all parties acted in good faith over the ... negotiations for the ELD”. Mr Fava’s evidence continued:
621. Mr Leung then said good faith in the price negotiation process was essential. I assured Mr Leung I would be negotiating the ELD price for Matam in good faith and Mr Leung said that he would be doing the same for Aral. I made some positive comment about this.
622. Mr Leung then said he wanted the sale and purchase agreement negotiated in good faith as soon as possible so that the whole development could proceed. … This led to talk about the need for construction to commence as soon as the sale and purchase agreement and consequent finance was in place so as to meet the 30 September 1999 deadline. This led to talk about working drawings for construction which I said were under way but with a cloud around the integration until I had a deal in place with Aral. Mr Leung said I now had a deal in place with Aral so I should therefore go ahead and get the plans completed and be ready to start building as soon as the sale and purchase agreement and consequent finance was in place.
[66] Mr Harris said his recollection was :
Mr Leung made a point to Mr Fava and the meeting that once there was a contract for sale and purchase between Matam and the Joint Venture in place, obtaining finance for construction would be straightforward and that Mr Fava should proceed.
I also remember Mr Leung pointing out to Mr Fava that the purchase price was to be set by reference to two valuers and he did not want to go through that exercise to find that Mr Fava was holding his hand out for some other figure which bore no resemblance to that valuation - he said he expected Mr Fava to act in good faith in relation to the purchase price determination process. He would be doing so for Aral.
Mr Leung seemed to be persuaded that the expansion land development anchored by The Warehouse was a good idea. After four days of on and off discussion we agreed all the terms of the MOU. Mr Chong and I drafted up the MOU at the hotel business centre.
[67] Mr Harris’ brief’s version of the representations made at the 16 October meeting was:
172It was at this meeting that the issue of good faith arose. Mr Leung raised this. Mr Leung did not want to go through the valuation process where the Joint Venture got a valuation and Matam got a valuation and Mr Fava then asked for a purchase price that bore no resemblance to those two figures. Mr Leung said that the parties needed to act in good faith. Both Mr Fava and Mr Leung said that they would be negotiating in good faith.
173Mr Leung said that with an unconditional sale and purchase agreement in place Mr Fava would be able to arrange construction finance.
[68] On the following day of his evidence at the substantive hearing after further elaboration on the manner of preparation of his brief, the contradiction was put to Mr Harris that he had said several times in evidence that there was no pre-leasing discussion preceding the MoU but his brief said such a discussion did take place. He endeavoured to explain the contradiction by pointing to his brief saying “no further leasing of the ELD would take place” between the Singapore discussions and execution of any contract to buy the ELD. He then withdrew that passage.
[69] He also agreed that the statement in his brief that it was discussed that “Aral and Cachinal would enter into an unconditional agreement” to buy the ELD should have read “might enter into a binding agreement”. “Would” was misleading.
[70] He then accepted his description of the matters discussed at the Singapore meetings was very similarly expressed to Mr Fava’s description but said the form of his brief was not because Mr Fava had told him to phrase it that way. It was a mistake for him to adopt any comments Mr Fava made.
[71] Of the execution of the MoU when, it is claimed, the representations were made, Mr Chong’s brief said:
72.Execution of the MoU took place in Mr Fava’s hotel suite. At this time Mr Leung made an issue about the parties acting in good faith and in particular said that when the valuation was out Mr Fava must not ask for some figure that bore no resemblance to valuation. Mr Fava committed to acting in good faith and Mr Leung said he would be acting in good faith for Aral. The words “good faith” were used. Mr Leung said he wanted the sale and purchase agreement negotiated in good faith and he wanted it in place as soon as possible. Mr Leung said that as soon as there was a sale and purchase agreement in place Mr Fava could arrange construction finance easily. I recall the words “easily” or “easy” in respect of arranging finance being used by Mr Leung.
73. I recall having a very clear impression after the sign up of the MOU
that everyone was going to act in good faith ...
74.When the MOU was being signed up Mr Leung told Mr Fava to go and tell Deka the expansion land development would be definitely going ahead anchored by The Warehouse. He told Mr Fava to tell
Deka that Aral and Cachinal would be buying the completed expansion land development so that the whole complex was integrated into one. ...
[72] Mr Chong was, unsurprisingly, cross-examined about events at the October
1998 meetings. He said the MoU reflected all the agreements reached at the meeting. He accepted, however, that his comment in the brief about construction finance was just “normal chatting, normal talking, what we say casually” and it is “not something serious to record the MoU”. Similarly, the comment that the joint venture would be “buying the completed” ELD was made “quite casually to me”. Neither comment appear in any notes of the meeting.
[73] There was a similar response to the suggestion in Mr Fava’s affidavit that all present knew Matam needed a contract from the joint venture for the sale and purchase for it to obtain construction finance. That comment, Mr Chong said, was at a time when they were “talking casual and some time they are just like friends”.
(3) Defendants’ Evidence
[74] Concerning the October 1998 meetings, Mr Leung said they were quite pleasant, those present talked about the ELD as a good idea and Mr Fava said he had a lease with The Warehouse and Deka wanted to come in. That is what they called the “Golden Triangle” with Woolworths already in Pacific Plaza. That notwithstanding, he said he stressed to everyone that Aral was not committed at that stage and any deal would be subject to due diligence and board approval – as Mr Fava’s notes confirm. HSBC financing was agreed as crucial.
[75] Mr Leung told the meeting Aral would only consider joining in buying the ELD after construction and when fully tenanted and producing an acceptable return. He said he expressed interest on Aral’s part after being told Matam had bought the expansion land. He said he received satisfactory assurances as to demand for office space and continued :
Mr Fava endeavoured to persuade me to allow Aral and Cachinal to commit to a conditional agreement to purchase the Expansion Development immediately, with settlement to occur when it was completed. I told him and Mr Harris that I wanted a detailed proposal finalised before any
commitment could be made by Aral. This would include completed plans, a construction contract and an offer of construction finance, leasing commitments for the development space, finance to fund the acquisition of the development on completion and valuations. In other words Matam would need to demonstrate that the development was feasible and that it could undertake and complete it. It also needed to demonstrate that it would produce an adequate return for Aral.
I was firm about this. If I was to entertain this proposal ahead of it being completed, I wanted to be assured of Matam’s ability to perform. I stressed the need for liquid, readily enforceable, rental guarantees from Matam. …
On that basis, I went along with the proposal that Matam, Cachinal and Aral signed a “non legal binding” Memorandum of Understanding. This recorded the existing intentions of the parties at that time and set out a procedure for taking negotiations forward. …
When I executed the Memorandum of Understanding, I made it clear that it was a record of our common understanding, not a contract. That is why it was stated to be “non legal binding”. Nevertheless, when I signed the Memorandum of Understanding on Aral’s behalf on 16 October 1998, I did so because I considered that Aral had a genuine interest in acquiring the completed Expansion Development in conjunction with Cachinal. There was no attempt on my part to mislead Mr Fava and Mr Harris. If it could be made to work, I was prepared to recommend it to Aral’s Board for its approval. …
… Mr Fava claims that all those present at the negotiations during October
1998 clearly understood that Matam needed a contract from Aral and Cachinal for the sale and purchase of the completed Expansion Development at a price that enabled development finance to be arranged by Matam. That was not my understanding. …
At our meeting in October 1998, I made it clear to Mr Fava and to Mr Harris that Aral was not making any commitment to enter into an agreement to purchase the completed development. Although the existence of such an agreement would no doubt have facilitated Matam’s endeavours to raise construction finance, that was not Aral’s responsibility. If we were able to negotiate a conditional agreement for sale and purchase of the completed development in a timely manner and if that agreement was approved by the Board of Aral, then all well and good. However, I made no commitment to Mr Fava and Mr Harris that this outcome would be achieved. Matam was responsible for arranging its own development finance without assistance from Aral. …
Mr Fava alleges that I specifically stated that I wanted the sale and purchase agreement negotiated in good faith as soon as possible so that the whole development could proceed and that I expressed the opinion that with the agreement in place, construction finance would be easily arranged.
That is not an accurate representation of what happened. I did tell Mr Fava that I expected him to negotiate the sale price in good faith, once we had obtained valuations from the valuers. I did not want him to have unrealistic expectations of the development’s worth and demand a sale price that was materially higher than valuation. I did not mean that the parties should pay
the valuation price. That would have been contrary to the Memorandum of
Understanding, which provided that the valuations were for reference only.
I may have expressed the view that, with a sale and purchase agreement in place, this would assist Matam in arranging finance and I still believe that this is the case. It is obvious commercial sense that a bank would be more likely to lend to a developer that has a contract for sale of the completed development than to one without.
However, I did not state that the agreement would make the raising of such construction finance easy. I had no details regarding the financial position of Matam. I did not know what security Mr Fava was prepared to offer its financiers. I was therefore not in a position to express any opinion as to the ease with which Matam could raise finance. …
[76] Mr Leung said the oral representations against the defendants were not, as pleaded, deliberately false. He told everyone they needed to act in good faith, which was no more than expecting everyone to behave properly, despite his earlier difficulties with Mr Fava. He denied he was trying to trick Mr Fava into thinking he had a deal. Mr Fava’s evidence as to representations to that effect was untrue. He would not have told Mr Fava he had a deal when any arrangement was subject to approval by the Aral board and HSBC. The MoU’s “non-legal binding” status correctly represented the position. He had no intention of getting Mr Fava’s interests to over-commit to the ELD in order that Aral could buy out Cachinal. Whilst they discussed the Deka lease and Mr Fava’s representations of additional tenants, that was all it was and Mr Leung was not trying to defraud Mr Fava’s interests in that regard. He was genuinely interested in seeing whether they could do a deal on the ELD in order to turn Pacific Plaza into the hoped-for success. But he needed details and commitments to be assured the proposition made good commercial sense.
[77] He wanted a detailed proposal to submit to his board, together with plans, a construction contract, construction finance commitment, and leasing commitments. He also insisted on rental guarantees from Matam. He said Messrs Fava and Harris were both aware of the limits of his authority from the Aral board.
[78] The ELD proposition was fundamentally different from the HoA because Pacific Plaza had been built before it was signed. A considerable amount of investigation had been done and approval had been obtained. The ELD was still in the planning stage, not built, and with no tenants (other than The Warehouse which
would account for only one-third of the required rental stream). With the MoU they were just talking about a piece of land with no construction in progress. All the MoU did was to prescribe a process “for the parties to move forward in their negotiation of a proposed agreement for sale and purchase”.
[79] Mr Leung said he told Mr Fava he expected him to negotiate the sale price in good faith once valuations were obtained, free of unrealistic expectations of the development’s worth. There was no commitment to buy at valuation: the MoU said valuations were for reference.
[80] Mr Leung did not state that the MoU would make the raising of construction finance by Matam easier, though he expected this to be the case. He knew nothing of Matam’s financial position or the security it could offer. Construction finance was a separate matter, solely in Mr Fava’s hands.
[81] Mr Leung disputed the truth of the assertion that the parties in Singapore understood there would be no leasing of the ELD before construction commenced, other than The Warehouse. He would never agree to such a proposal. Indeed, there was much discussion in Singapore about prospective tenants Mr Fava claimed to have ready to sign. The understanding was that he would work hard to tenant the ELD. He agreed he told Mr Fava he would have to “work very fast” to fill the ELD with tenants.
[82] There was no mention of pre-leasing but “this one has got an implication that in my mind at that time we need to have a certain amount of leasing to be taking place” but, when taxed as to why such an important matter was not included, he referred to Mr Fava’s assurance that he had many prospective tenants and some secured but then said:
“MoU is a non-binding agreement ... to set up a process for us to assess and this (pre-leasing) will be one of the areas that we will go into”.
[83] After the MoU was signed they had a drink and Mr Leung said “this is the way to do business”. They all had to work hard to turn things round to make Pacific Plaza successful. He agreed he told everybody they had to act in good faith. Then the following cross-examination took place:
Q. “... the true position was that you never had any intention of ever having Aral buy the ELD?
A. No, absolutely no.
Q. Hadn’t you decided that here was your chance to put Mr Fava in his place once and for all?
A. No (shakes head). [The Judge’s note reads “indignantly”]
Between October 1998 and April/May 1999 meetings:
(1) Pleadings
[84] As far as events after 16 October are concerned the claim continued :
On various dates on or between 16 October 1998 and March 1999, the Defendants made the following representations by telephone from the Second Defendant in Singapore and in person by the First Defendant’s agent, Chong Wai Sum in person at meetings in Auckland, to the Plaintiff by its agent, Philip Fava in New Zealand:
(a)That as soon as a valuation of the expansion project was available, they would arrange an agreement for the purchase by the First Defendant of a 50% interest in the expansion project; and
(b)That it would be easy to arrange construction finance once the agreement for sale and purchase was executed; and
(c) That they would act in good faith and use their best endeavours to obtain finance from the Hong Kong Bank to enable the First Defendant and Cachinal to settle the acquisition of the expansion project.
(2) 16 October 1998-21 March 1999
[85] On his return Mr Fava arranged for Matam to settle the expansion land purchase and re-instructed consultants. As required by the MoU, valuers were instructed on 12 November 1998. On 18 November 1998 during a conference call Mr Fava said both Mr Leung and he repeated they would be negotiating the ELD price in good faith for their respective principals and Mr Leung again said that with the sale and purchase agreement to Aral and Cachinal in place Matam would be able to arrange construction finance.
[86] HSBC sent a draft indicative offer of finance on 11 November 1998 for the purchase of the ELD conditional on 75% minimum pre-leasing by net value of the property with a guarantee for the balance. Mr Leung thought the 75% leasing condition was likely to be difficult to achieve given lack of progress to date.
[87] Mainzeal’s construction price received on 23 November 1998 significantly exceeded budget so, in order to cut construction costs, Mr Fava deleted the office tower component which was to be leased and then sold to the joint venture and substituted an apartment tower to be sold as unit titles. He also decided the library would be sold to Rodney District on unit title rather than Council leasing the space. The MoU did not prevent Mr Fava from changing the concept. All that would be left to be sold to Aral and Cachinal was the retail component which, Mr Fava said, was all the joint venture “required to enhance their existing Pacific Plaza investment”. Mr Fava did not tell Mr Chong of the changes until they spoke between Christmas
1998 and New Year 1999. Mr Leung was surprised at the lack of consultation before the changes and regarded this as a lack of good faith on Mr Fava’s part.
[88] An updated valuation from CB Richard Ellis (including the library) was received on 5 March 1999 valuing the ELD at $12.42m.
[89] A Robertson Young Telfer valuation on 8 March 1999 valued the completed ELD at $12.18m but was uneasy about the lack of leases and the strata title development. The valuation was based on “achieving a minimum of 60% leasing of specialty shops by rental value”.
[90] On 11 March 1999 Messrs Fava, Harris and Chong met to discuss acquisition of the ELD by Aral and Cachinal. Mr Chong’s minutes record the change of office space to apartments and the change of the laboratory to a library. HSBC’s requirement for 75% leasing at settlement was noted, as was Mr Fava’s response that achieving that “may not be practical”. The ELD was defined as The Warehouse area, retail areas and mezzanine. The minutes then said that under the MoU the “parties were to discuss the purchase price in good faith once the valuation … was obtained” and note Mr Fava saying Matam would accept the $12.42m if “matters were moved ahead quickly and that other terms of the agreement between the parties
were acceptable”. The minutes said Mr Harris was to discuss purchase price with Mr Leung. The minutes then set out at length what were said to be advantages and disadvantages of an Aral/Cachinal purchase of the ELD, all of which Mr Harris was to discuss with Mr Leung by letter.
[91] Mr Harris initially sent those minutes to Mr Leung with a covering letter mentioning delays since the MoU which largely arose from changes to the proposed construction and saying that “unfortunately (and through no fault of Aral) time has become an issue as for Philip to advance matters with the joint venture requires a commitment at the earliest opportunity”.
[92] On 17 March 1999 Deka advised it would definitely make the move to Pacific Plaza and on the following day Messrs Fava and Chong went to HSBC seeking finance for the joint venture to buy the ELD.
(3) 21 March 1999 letter
[93] On 21 March 1999 Mr Harris wrote to Mr Leung on Cachinal’s behalf. The drafting of the letter and its tone became contentious. Whilst laudatory concerning the ELD, the letter said “Matam must have a deal with Aral and Cachinal right now to enable its construction finance to be arranged”. Matam could finance the ELD without commitment from Aral and Cachinal though it would then be “in a full competitive situation with Aral and Cachinal seeking to secure for the expansion land development whoever Matam can source in the market place”. Mr Harris expressed concern this “could include existing Pacific Plaza tenants”.
[94] The letter set out four options: the joint venture buying the ELD; HSBC lending against the percentage of the space let overall; Cachinal buying Aral’s share at $30m with Aral paying $11m for the apartments; or the “full competitive Aral and Cachinal versus Matam scenario”. Options 2 and 3 involved Aral buying residential property which it did not do. Option 1 was the best, and Option 4 would have “disastrous consequences for Aral and Cachinal because Pacific Plaza would collapse and be worth far less than $20m and Mr Fava’s investment in Cachinal would be “worthless” and Aral and HSBC would be “left with the consequences”.
[95] The letter went on:
Philip tells me that time is up. It is some six months since we all signed up the MoU in Singapore. The delays have been no fault of yours David. Philip recognises that and even accepts that the delays have been caused by him. Nevertheless he needs commitment from Aral and Cachinal right now or come this Tuesday Churchill will immediately resign as manager of Pacific Plaza and Matam will have no choice but to be out in the market place securing every available tenant for the expansion land development.
…
Philip is serious that in an absence of an indication from Aral that they will do a sensible deal along the MoU lines discussed in Singapore together with firm arrangements to meet in London, Singapore or Auckland on Wednesday or Thursday this coming week to finalise a deal then the full competitive and inevitable disastrous scenario will eventuate. It would be against his wishes but he has no choice in the matter.
[96] Of some note, Mr Harris’ brief did not discuss the contents of his letter of
21 March 1999.
[97] Concerning the letter, Mr Harris accepted it was jointly prepared by Mr Fava and himself and designed to convince Aral of the need to commit to buying into the ELD. The statement that for Matam to fulfil its obligation to complete the building for The Warehouse by 30 September 1999 “Matam must have a deal with Aral and Cachinal right now to enable its construction finance to be arranged” was Mr Harris speaking on behalf of Matam rather than Cachinal. “Matam can finance the expansion land development without commitments from Aral and Cachinal but it would need other tenants” was based entirely on what Mr Fava told him. The statement that if Matam acted independently it would be in a “full competitive situation with Aral and Cachinal” was, he accepted, written with Mr Fava’s express approval. He then accepted that his statements as to the serious reduction in the parties’ equity was “overstated”. He didn’t believe it and it was a “lie”. The statement that Mr Fava was “prepared on a worst case scenario to write off the existing Pacific Plaza investment and make a profit on the Matam investment” was again his repeating what Mr Fava told him.
[98] In making those statements he was not, he accepted, speaking independently as Cachinal’s director and he could not explain how as director of a joint venture company committed to good faith conduct, he could write to his joint venture partner
making statements designed to commit the joint venture to enter into a contract not knowing whether the statements were true. Seeking a commitment within 48 hours was, he accepted, a “disgraceful threat” from a joint venture partner. The following exchange took place:
Q. Do you consider you complied with your obligations to Aral in the way in which you phrased this letter?
[474] Without the hearing being concluded, including submissions, it would not be correct to pronounce finally on this issue, but the nub of Mr Fava’s assertion is assumed to lie in his three heads of potential exposure and Murdoch Hall’s letter. Even if, as Murdoch Hall asserted, the 14 March 2000 contract might have cancelled the 26 October 1999 settlement and opened Aral to this claim, everything was still predicated on achievability of the conveyancing results. There is no evidence such was the case.
[475] In addition, it must be said that perusal of the signed and the most formal (but unsigned) versions of the contract between Aral and Nomoi to buy the Superstore land in evidence does not, as Mr Fava and Murdoch Hall asserted, appear clearly to cancel the agreement of 26 October 1999. One of the 14 March 2000 contracts contains a release, but not of the 26 October 1999 contract. Submissions would have been needed on that topic.
[476] All of that notwithstanding, even assuming Bell Gully might conceivably have been vulnerable to a claim for professional negligence by Aral for its professional services after October 1999 – and for the reasons mentioned that seems very doubtful – it is extremely difficult to see Bell Gully as being vulnerable to Aral to indemnify it for any judgment that might have been given against Aral for events
prior to October 1999: the factual links, the quantum and the suggested linkages do not seem to exist or add up, even without submissions on the topic.
[477] The conclusion must accordingly be that Mr Fava’s assertion as set out in paras [459](b) and [467]-[470] seem unlikely to have been capable of being effected, seems even more unlikely to have been founded or been the motivation for the way in which Bell Gully has represented Aral throughout this litigation and therefore falls well short of identifying Aral and Bell Gully to the extent of providing “any other reason” under r 14.7(g) to deny the costs application.
[478] The position concerning para (c) has elsewhere been considered in detail and both streams rejected: if more determined than might customarily have been encountered, Bell Gully’s responses were prompted only by the stridency of the plaintiffs’ and Mr Fava’s allegations, and Mr Fava’s repeated assertions of “concoction” in respect of Mr Chong’s statements issue has been conclusively rejected.
(b) Rules 14.6 and 14.7:
[479] In light of all of that, the question is whether the defendants have shown that the Court should order increased or indemnity costs in their favour against Mr Fava and the plaintiffs, that is to say costs exceeding the $521,560.50 to which they are entitled under Category 3.
[480] Looking first at r 14.6(3)(a) the view must be that the nature of the proceeding and the way in which the plaintiffs dealt with its interlocutory phases, suggest the defendants were required to spend substantially more time on it than a normal case under Band C. The review of the more egregious aspects of the interlocutory history of this case amply supports that view. Then, the pleadings involved deceit. That always leads litigants to defend their reputations firmly, and led to Mr Leung defending himself to the utmost, particularly against a background of assertions of improper conduct against him and a number of others made in terms and circumstances designed to cause him maximum embarrassment. The amounts claimed were very large – probably extravagantly so - and, as far as the damages are
concerned, were difficult and expensive to rebut. There were more and more bitterly fought interlocutories than normal.
[481] As regards r 14.6(3)(b), the question is whether the plaintiffs and Mr Fava contributed unnecessarily to the time and expense of the claim by the means listed in the Rule. The only matter in the sub-rule which might justify increased costs in the interlocutory phase is pursuing an unnecessary step or an argument lacking merit. That might be said to apply to the Anton Piller application and the plaintiffs’ application to rescind the order for security for costs. For the reasons mentioned, it can now be seen there was no merit in the Anton Piller application. In a case as lengthy, complex, and extensive as this, quite irrespective of the personal acrimony between the parties, security for costs would be regarded as routine.
[482] Rules 14.6(3)(c) and 14.6(4)(b)-(e) have no application to this case.
[483] The principal matter in issue is therefore whether “some other reason” exists to justify orders under rr 14.6(3)(d) and 14.6(4)(f) and whether the plaintiffs and Mr Fava “acted vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing or defending” the claim under r 14.6(4)(a). particularly in the post-interlocutory phase. Against that, the Court must consider whether “some other reason exists” which would justify refusing costs or reducing them in terms of r 14.7(g). That has been partly discussed in dealing with Mr Fava’s objection.
[484] Seen by a person with no prior involvement in the case or knowledge of the parties, this file, at least up to the commencement of the substantive hearing, might well be seen as one which was difficult, complex, extensive and hard-fought and where the parties had entrenched attitudes antagonistic to each other but one which, to the extent it could be encompassed within that description, would not be seen as out of the ordinary. In particular, of the four main participants at the critical meetings, three were giving evidence for the plaintiff and their briefs broadly harmonized on principal issues. Depending on the documents seen and the interpretation ascribed, there might have been thought to be a supporting documentary trail. True, the disinterested observer would have noted Mr Leung’s brief took issue with the plaintiffs’ witnesses on nearly all significant matters and
there were obvious difficulties about enforceability of the MoU, the March/April
1999 exchanges and the damages claims but, broadly, the claim might have been seen as not necessarily vexatious, frivolous, improper or unnecessary.
[485] However, if at any time between the claim being launched and the beginning of the substantive hearing the impartial observer became aware of the whole of the background discussed extensively in this judgment and came to know Mr Fava and, to a lesser degree, Mr Harris, well, that person might have taken the view that the thesis of Messrs Fava and Harris – particularly the former – which they believed underlay the matters in issue, was highly suspect, for the reasons discussed extensively in this judgment. The likelihood of judgment for the October 1998 meetings and the MoU was dubious. What took place in March/April 1999 depended, for the plaintiffs’ success, on only their view being upheld. That particularly manifested itself in the Anton Piller application when the claim was still unserved. Thus they might have tentatively concluded that commencing and continuing the claim might have been, if not frivolous, then possibly vexatious (though not as that term is described in s 88B of the Judicature Act 1908 and the cases under that section: McGechan on Procedure para J88B.04 p 3-140). It was also possibly improper in a broad sense and it was necessary only in the sense of Mr Fava wishing to vindicate his views and, hopefully, make a very considerable amount of money. Still, with three out of the four main witnesses prepared to give roughly similar versions of events for the plaintiffs and only one main witness opposing them, the disinterested observer, while perhaps very dubious or sceptical as to the justification for or wisdom of the plaintiffs beginning and continuing the claim, may not have seen at that stage that so doing was highly likely to expose the plaintiffs to an application for increased or indemnity costs.
[486] The disinterested observer who knew nothing of the background before the substantive hearing began would, however, be very likely to have had second thoughts as the plaintiffs’ case proceeded. And the disinterested observer who was aware of the background would be likely to have had the most serious misgivings at that point as to the wisdom or justification for the plaintiffs continuing. In large part, that would have arisen from the very damaging cross-examination of Messrs Fava, Harris and Chong and, to a lesser degree, the cross-examination concerning
damages. For reasons given elsewhere, though Mr Fava had, in cross-examination, “stuck to his guns” as far as he was able, the impartial observer would have concluded that his evidence showed him to be lacking in credibility on significant points – his attempted rationalization of the conditional contract point was one example - Mr Harris’ evidence to be unable to be accepted – he effectively invited the Court to disregard it - and Mr Chong wanting to “strike out” his own evidence.
[487] At that point, the impartial observer would have concluded that, in pressing on, the plaintiffs and Mr Fava were bringing themselves within rr 14.6(3)(d), (4)(a)(f) and were clearly risking an order for increased or indemnity costs if they did so. Difficulties in the damages claims would have been thought to buttress that view.
[488] The plaintiffs and Mr Fava would no doubt have countered by saying all was not lost to them at that stage with Mr Leung’s evidence and cross-examination still to come. That view, however, would not have been justified for the reasons, first, that, though highly likely given the allegations against him, the plaintiffs could have had no certainty the defendants would call evidence given the state of the litigation at the conclusion of the plaintiffs’ case. Secondly, Mr Fava and Messrs Harris and Chong knew Mr Leung well and, had he or they been able to consider the matter dispassionately, might well have expected Mr Leung to stand up well – as he did – to cross-examination. The impartial observer would, therefore, at that point in the litigation, have advised the plaintiffs and Mr Fava to end the litigation by one means or another or risk orders for increased or indemnity costs should they continue.
[489] They did, of course, continue to the point where it was only Mr Fava’s bankruptcy that ended the litigation with judgment for the defendants.
[490] Seen in that light but putting the background aside, the plaintiffs and Mr Fava must be held to have run the litigation – in the interlocutory phase and substantively
- throughout in a way which substantially increased the defendants’ costs between what was inherent in a claim of this length and complexity and possibly acted vexatiously, frivolously, improperly or unnecessarily in continuing with the
litigation. That especially applies beyond a point towards the end of the plaintiffs’
case.
[491] However, once the background was factored in, the decisions of the plaintiffs and Mr Fava as to the way in which the litigation was begun and managed up to the commencement of the substantive hearing, the decision to embark on the substantive hearing and the decision to continue it beyond the point of the plaintiffs’ case mentioned must be seen as largely if not wholly motivated by Mr Fava’s unjustified views as to what was galvanizing the defendants. That clearly amounts to “some other reason” to order increased or indemnity costs from that point on and the Court has found there was no “other reason” to reduce or refuse costs under r 14.7(g).
(3) Conclusions
[492] The result therefore is a combination of rr 14.6 and 14.7. Even if the plaintiffs and Mr Fava might, with major difficulty, be thought to be justified in the way in which they began and managed the litigation up to the commencement of the substantive hearing and, perhaps, towards the end of the plaintiffs’ case, there could have been little, if any, justification for them in continuing beyond that point.
[493] The conclusion is therefore that the way the plaintiffs and Mr Fava commenced and ran this litigation up to and towards the end of the plaintiffs’ case was such that – particularly in the latter portion of that period - they are liable to an order for increased costs. To continue the litigation beyond that point, they are liable to indemnity costs.
[494] As an aside, it should be observed that orders for increased or indemnity costs are not tantamount to a fine for bad behaviour. But they are a reflection of the conduct of the plaintiffs and the way Mr Fava commenced and ran the litigation.
[495] At the costs hearing, neither counsel nor Mr Fava addressed the quantum of the costs claim or the detail of its components. In such matters it is almost invariable when detail is being considered for there to be a multitude of differences of view about the reasonableness of parts of the claim, the necessity for steps undertaken, the
reasonableness of the costs, issues such as the incidence of GST particularly on a New Zealand subsidiary of an overseas company, and about numerous other matters. The award should also recognise that for a large part of the life of the claim the defendants have been held to be entitled only to increased costs.
[496] In light of that – though accepting the approach is somewhat arbitrary – it has been decided to allow the application for increased costs both before the substantive hearing began and because of the interlocutory activity and its tone up towards the end of the plaintiffs’ case. Mr Chong’s evidence concluded on 24 November 2006, Day 21, and the plaintiffs’ case concluded on 27 November 2006, which was Day 22 of the hearing. Doing the best that can be done with the figures, it would seem appropriate to allow the defendants’ increased costs in an amount of about thrice scale for that period (including expert/witnesses’ fees). An amount of $1.6m is allowed for this period.
[497] For pressing on unjustifiably beyond that point for another nine hearing days, the plaintiffs and Mr Fava should be ordered to pay indemnity costs. Again doing the best that can be done on the figure but recognising the result cannot be precisely calculated and needs to take the uncertainties mentioned into account, an allowance has been made against the plaintiffs and Mr Fava of $400,000, approximately what the defendants were charged for this period. No separate allowance has been made for subsequent attendances. The overall result approximates two-thirds recovery.
[498] Mr McBride’s researches showed that at the time of delivery of this judgment all the plaintiffs are extant. None are in receivership or liquidation. The order on the costs application against them will therefore be against all four jointly.
[499] There is no conclusion realistically open other than to hold that an order for increased and indemnity costs should be made against Mr Fava personally, in addition to the orders against the plaintiffs. His actions throughout the conduct of this claim fit clearly within the criteria outlined in Asset Building M Pritchard Ltd. He was responsible for the plaintiffs initiating the proceeding in the manner they did. He was responsible for controlling them thereafter.
[500] Though his web of trusts and companies was likely not to have led to payments to him personally – one of the factors in creating that web was tax avoidance - had the plaintiffs succeeded in their litigation, he would clearly have ensured that he and his interests would have been the ultimate beneficiaries: the evidence in the substantive claim concerning the companies and trusts controlled by him and the level of his personal participation in the litigation as shown by the evidence discussed in this judgment, all combine to indicate that he should be held not to be able to escape personal liability for costs. In a way the whole of the litigation has been conducted for the ultimate benefit of him and his interests through companies which were either insolvent or were incorporated solely to participate in the matter at the heart of this case and in the litigation itself. The evidence repeatedly showed up his companies and trusts were mere vehicles to further his interests. Further, he has persistently alleged impropriety and bad faith. It could not be said that he acted in the interests of the plaintiff companies rather than his own interests. In terms of Dymock, the companies may have been the nominal plaintiffs but he was the “real party” to the litigation.
[501] Up until 7 December 2009 Mr Fava remained bankrupt but an order against him personally could still have been made during his bankruptcy for the following reasons:
a)The Insolvency Act 1967 applies to Mr Fava’s bankruptcy because s 444(2) of the Insolvency Act 2006 states that the former Act continues to apply to the exclusion of the latter to any “past event” even if taken after the commencement of the 2006 Act. “Past event” is defined by s 444(1) to include the issue of a bankruptcy notice before the 2006 Act came into force. That applies to the bankruptcy notice served on Mr Fava.
b)Although s 32 of the 1967 Act provided that “any debt provable in the bankruptcy” was stayed on adjudication, the costs order against Mr Fava personally was not a “debt provable in the bankruptcy” because of the effect of s 87(1) of the 1967 Act which read:
87 Provable debts
(1) . ... all debts and liabilities, present or future, certain or contingent, to which the bankrupt is subject at the time of his adjudication, or to which he becomes subject before his discharge by reason of any obligation incurred before the time of his adjudication, shall be debts provable in bankruptcy.
c)The personal order for costs against Mr Fava was not in contemplation at the time of his adjudication and although he had become subject to that obligation before his discharge, it was not by reason of any obligation incurred before adjudication. Accordingly, there is no bar in law to the making of an order in the costs application against Mr Fava personally. And it is appropriate that his liability be several and not jointly with the plaintiffs.
[502] On 7 December 2009 Mr Fava applied for an order that delivery of this judgment be delayed until such time as his appeal against the judgment of 20 August
2009 had been decided. Although the separate judgment dismisses that application, consideration was given to whether delivery should be postponed until the forecast r 10.9 application had been filed and determined one way or the other. It was decided not to adopt that course. Amongst the reasons are that there is not, as yet, complete certainty that the r 10.9 application will be filed – although it seems very likely given Mr Fava’s participation in this claim to date.
[503] Further, while it would be desirable to complete the substantive hearing and deliver a judgment on the merits, for reasons explained throughout this judgment it is highly unlikely that the result would change following the defendants’ remaining evidence and submissions from both sides. Rather than beleaguer this case with further interlocutory applications, possible appeals and further significant delays, in light of the firm conclusions that have been able to be reached, however tentatively, on the central issues in the case, it is considered better to complete the proceeding in this Court and leave the parties to such appeal rights as they may wish to exercise.
Result
[504] Therefore, the defendants having demonstrated an entitlement to increased costs on major parts of the litigation, and indemnity costs on others, and to avoid lengthy arguments about the type of incidental matters just mentioned, the result is:
a) The defendants are entitled to an order for increased or indemnity costs against the plaintiffs jointly and Mr Fava severally which are fixed in the sum of $2m.
b)The sum lodged by the plaintiffs for security for the defendants’ costs and interest accrued thereon (currently about $115,000) is to be paid by the Registrar to the defendants’ solicitors in partial satisfaction of Order (a).
c) The $300,000 received from Mr Thomas is to be taken in partial satisfaction of Order (a).
d) Any enforcement action must give credit for receipt of the sums in (b)
and (c).
e) Within 42 days from delivery of this judgment the defendants are to advise if they intend to continue to seek an order for increased or indemnity costs against Mr Yee and Murdoch Price. If they do, a conference will be convened to make timetable arrangements concerning that matter.
f) For the avoidance of doubt, the sum for which the plaintiffs and Mr Fava have been found liable to the defendants is to include the costs of the increased or indemnity costs hearing and all subsequent appearances.
.................................................................
HUGH WILLIAMS J.
Solicitors:
McElroys (Andrea Challis/Rachel Scott), P O Box 835 Auckland 1140, for Mr Yee and Murdoch
Price Email: andr[email protected] / rach[email protected].nz
Murdoch Price & Co (K M Yee) P O Box 23 620 Hunters Corner, Manukau 2155
Email: [email protected]
Bell Gully (Ralph G Simpson/Josh McBride) P O Box 4199 Auckland 1140
Email: ralph[email protected] / josh[email protected]
Shieff Angland (M Robertson) P O Box 2180 Auckland 1140
Email: [email protected] / Hele[email protected]
Copy for:
Mr Philip Fava, P O Box 37 606 Parnell, Auckland 1151 (Phone/Fax: 369 1719)
Email: [email protected]
Julian G Miles QC, P O Box 4388 Shortland Street, Auckland 1140
Email; [email protected]
Case Officer, Auckland High Court: Vasantha[email protected]
Scheduler: Corrin[email protected]
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