Commercial Factors Limited v Scenic Hotel Group Limited
[2023] NZHC 100
•3 February 2023
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2016-409-001141
[2023] NZHC 100
BETWEEN COMMERCIAL FACTORS LIMITED
Plaintiff
AND
SCENIC HOTEL GROUP LIMITED
First Defendant
AND
SCENIC HOTELS LIMITED
Second Defendant
Hearing: (Determined on the papers) Appearances:
P J Dale KC and A J Steel for Plaintiff
JBM Smith KC and J L W Wass for Defendants
Judgment:
3 February 2023
JUDGMENT OF OSBORNE J
Costs
[1]By this judgment I determine matters of costs in this proceeding.
[2] My substantive judgment was delivered on 19 September 2019 (reissued on 13 December 2019 and then reissued again on 30 July 2020).1
[3] In my subsequent costs judgment, in application of the primary rule that costs follow the event, I awarded costs to Scenic Hotel Group Ltd (Scenic) but with a five per cent reduction on account of Scenic’s late disclosure of an insurance claim.2 There followed an appeal and cross-appeal against the substantive judgment. The
1 Commercial Factors Ltd v Scenic Hotel Group Ltd [2019] NZHC 2370 [verdicts judgment].
2 Commercial Factors Ltd v Scenic Hotel Group Ltd [2020] NZHC 2407 [costs judgment].
COMMERCIAL FACTORS LIMITED v SCENIC HOTEL GROUP LIMITED [2023] NZHC 100 [3 February 2023]
Court of Appeal dismissed both those appeals.3 The Court of Appeal, by the same judgment, allowed an appeal against the costs judgment.4
The High Court proceeding
[4] The claim of the plaintiff, Commercial Factors Ltd (Factors), at trial was as pleaded in a second amended statement of claim.
[5] Factors’ claim arose from a business relationship that had developed with Scenic out of a proposal of Factors’ sole director, Terence Haydon, that there be a joint venture to acquire and run a Tongan hotel.
[6] Factors pleaded three causes of action – estoppel, breach of concluded joint venture agreement and “partnership”.
[7] By the substantive judgment I dismissed Factors’ claim in estoppel.5 In considering Factors’ second and third cause of action together, I concluded that there had been a pre-contractual joint venture between Factors and Scenic, but that it had been terminated with effect from 26 March 2015.6
The issues in the trial
[8] The primary rule in relation to costs — that costs follow the event — was central to the costs judgment, citing High Court Rules 2016, r 14.2(a).7
[9] The estoppel cause of action failed in the High Court and had no relevance to the issues arising in the Court of Appeal.
[10] The joint venture and the partnership causes of action were, however, central to the appeal. The Court of Appeal found that both the “joint venture” and the “partnership” pleadings were sufficient to permit consideration of the nature of the relationship between Factors and Scenic other than on a contractual basis, including
3 Commercial Factors Ltd v Scenic Hotel Group Ltd [2022] NZCA 300 (Court of Appeal judgment).
4 At [91]–[107].
5 Commercial Factors Ltd v Scenic Hotel Group Ltd, above n 1 at [192]–[219].
6 At [220] and [251]–[252].
7 Costs judgment, above n 2, at [5]–[11].
that it was a joint venture.8 Having regard to the evidence, the Court of Appeal upheld the High Court conclusion that a joint venture relationship existed between Factors and Scenic (and therefore dismissed Scenic’s ground of cross-appeal).9 That said, the Court of Appeal also upheld the High Court conclusion that Scenic was not indebted to Factors for $6.25 million.10 The Court of Appeal found that Scenic was nonetheless entitled to the declaration made in the High Court, albeit preferring to describe the relationship as an “operating joint venture” rather than as a “pre-contractual joint venture”.11
Costs adjustments in the High Court
[11]The costs judgment contained three principal conclusions:
(a)Factors had been wholly unsuccessful on its three causes of action (the declaration it obtained relating to a pre-contractual joint venture rather than the pleaded “joint venture”);12
(b)the costs incurred in Scenic’s successful recall application (to remove a direction as to the taking of accounts in relation to the pre-contractual joint venture vehicle) should not affect the quantum of costs, the litigation having gone astray through the approach taken by the Court;13 and
(c)there should be an adjustment (assessed at five per cent) for the costs associated for the additional costs caused to Factors through the late disclosure of information concerning insurance arrangements.
8 Court of Appeal judgment, above n 3, at [64]–[65].
9 At [74].
10 At [80].
11 At [81]–[84] and costs judgment, above n 2, at n 7.
12 Costs judgment, at [10]. The Court of Appeal stated it preferred ‘operating joint venture’ — see Court of Appeal judgment, above n 3, at [8].
13 Citing Manukau Golf Club v Shoye Venture Ltd [2012] NZSC 109, [2013] 1 NZLR 305 at [13].
Correction required by the Court of Appeal
[12] The quantum of costs awarded to Scenic has to be considered, on this remission, in light of the Court of Appeal’s findings as to errors of principle in the initial High Court costs judgment.
[13]Errors identified by the Court of Appeal may be summarised as follows:
(a)The High Court failed to identify the existence of the joint venture and the awarding of a declaration as representing an issue on which Scenic failed. Rule 14.7(d) High Court Rules gives the Court discretion to reduce costs otherwise payable under the rules if:
… although the party claiming costs has succeeded overall, that party has failed in relation to a cause of action or issue which significantly increased the costs of the party opposing costs …
It was an error not to consider r 14.7(d).14 On the issues on which Scenic failed, the ambit of the trial would have been “much narrower” had Scenic accepted the existence of a joint venture between itself and Factors.
(b)While in the initial High Court Decision there was a proper consideration of the application of r 14.7(f)(iv) and (g), Scenic’s failure to disclose the insurance policy and claim at an early stage had a much more significant impact than was recognised in the costs judgment because of the effect the failure had on the recall of the substantive judgment.15 The Court of Appeal found:16
… The policy and claim should have been disclosed well before Mrs Hagaman filed her brief. If that had been done, many of the difficulties that beset this case could have been avoided.
14 At [96].
15 At [98].
16 At [99].
(c)A principled response to those identified matters could have been either a larger reduction in the costs awarded to Scenic or an order that the costs connected to the recall should lie where they fell.17
[14] Given the submissions I have now received, it is appropriate to add at this point that the judgment of the Court of Appeal does not suggest that Factors should have been regarded as the substantially successful party in relation to its claims in the High Court. As the Court of Appeal judgment indicates, the central assertion of Factors was that it was owed (through a contractual joint venture) $6.25 million, plus interest, and had contributed a further $2,198,665.18 It failed to obtain any money judgment in relation to those claims. What Factors achieved was a declaration as to the existence of a joint venture with any accounting to be achieved not by recovery from the defendants but through the liquidation of the joint venture company, Pacific Hotels Ltd (Pacific) — a further unsuccessful aspect of Factor’s claims was an assertion that (failing Scenic being indebted to Factors for $6.25 million) Pacific was so indebted. The Court of Appeal upheld the High Court conclusion that Pacific was not indebted to Factors for $6.25 million.19
[15] The Court of Appeal did not interfere with the conclusion that Scenic was the substantially successful party in the proceeding. The issue to be addressed on remission is what adjustment on a principled basis ought to have been made. Such is reflected in the Court of Appeal’s conclusion that “[a] principled response could have been either a larger reduction of the costs awarded to Scenic or an order that the costs connected to the recall should lie where they fell”.20
Fresh costs submissions
[16]Counsel have addressed fresh submissions to this Court in relation to costs.
17 At [102].
18 At [39].
19 At [80].
20 Court of Appeal judgment, above n 3, at [102].
Submissions for Factors
[17] For Factors, Mr Dale KC submits the appropriate outcome would be a costs order in favour of Factors (with no quantum identified in the submissions), alternatively an order that costs lie where they fall or, alternatively to that, a significant reduction of any costs awarded in favour of Scenic.
[18] Mr Dale submits that the issue of costs was left completely at large by the Court of Appeal’s judgment and that the two approaches to reduction suggested by the Court of Appeal at [102] of its judgment were not intended to bind this Court on the reconsideration of costs.
[19] Mr Dale submitted that the conclusion that Scenic should pay Factors’ costs flows from a correct understanding of the outcome in the High Court as analysed by the Court of Appeal. Mr Dale submits that Factors was the successful party. He further submits the existence of the joint venture relationship was the central issue in the High Court proceedings, and the issue may be broken down into three sub-parts:
(a)Was there a joint venture?
(b)If so, who were the parties?
(c)What is the appropriate relief (the relief claimed by Factors being not only payment of the “purchase price” by Scenic but also the taking of accounts)?
[20] Mr Dale addresses a significant portion of his fresh submissions to the impact of Scenic’s late disclosure of the existence of the insurance policy and an insurance claim. At that point Factors applied (unsuccessfully) for Pacific to be added as a defendant. Relief is now available to Factors through the declaration that was made in the High Court (and upheld by the Court of Appeal) and the process of liquidation (and/or accounting) that will follow.
[21] Mr Dale referred to the Court of Appeal’s observations in relation to the High Court’s refusal to join Pacific as a party to the proceeding, when the only substantial
asset of the asserted joint venture was represented by the insurance claim — the Court of Appeal observing that that the parties’ respective positions “would have been better served dealing with that issue in the context of the existing proceedings”.21
[22] Mr Dale refers to the consequences in terms of delay and cost that the parties will now incur “well into 2024”, as a consequence of Scenic’s conduct. Mr Dale’s submission suggests that Factors’ success “on the JV point” represented the substantial success of the proceeding and that the failure to obtain other relief did not represent failure “in a material sense”.
Discussion
[23] On reconsidering the outcome on the substantive High Court judgment, I do not find reason to depart from the conclusion that Scenic was the substantially successful party in the proceeding. Nor do I read anything in the Court of Appeal’s judgment, when matters of costs were in issue on the appeal, to indicate a view on the part of that Court that I was incorrect in concluding that the primary costs principle was in favour of Scenic in relation to the substantive outcome.
[24] That said, there remain in the costs judgment errors of principle (as identified by the Court of Appeal) which fall to be addressed now. I will return to those and the broader exercise of my discretion below. The matters raised by Mr Dale most appropriately go to a consideration of those matters and not to determining who, in terms of the pleaded cases and relief, was the substantially successful party.
Scenic’s submissions
[25] Mr Smith KC submits that, in terms of the Court of Appeal’s remission of the issue of costs to this Court, there are two specific bases on which reconsideration is to occur, namely:
(a)Whether the position taken by Scenic on who were the parties to the pre-contractual joint venture should have been taken into account in assessing costs under r 14.7(d); and
21 At [44].
(b)Whether the late disclosure of the insurance arrangements by Scenic should have resulted in either a reduction in costs or an order that costs on the recall should lie where they fell.
[26] Mr Smith submits that Factors failed to obtain the outcome it sought, namely a very substantial money judgment reflecting an unfulfilled equitable or contractual obligation to purchase the hotel in question. Factors failed to establish the binding purchase commitment that was central to its claim. That substantive finding in the High Court was upheld by the Court of Appeal.
[27] Mr Smith accordingly submits that Scenic did not (in terms of r 14.7(d)) fail “in relation to a cause of action or an issue which significantly increased the costs of the party opposing costs”.
[28] In Mr Smith’s submission, Scenic did not fail in relation to any cause of action, as all causes of action were dismissed. He submits that neither the existence of a pre-contractual joint venture nor the identity of a party to that joint venture were material issues. He further submits that Factors cannot point to anything in establishing the finding that Scenic was a party to the pre-contractual joint venture significantly increased Factors’ costs in the proceedings as “the majority of the evidence and the trial time was occupied with determining whether a commitment had been reached to purchase the Hotel”.
[29] Mr Smith submits therefore that this Court may, upon a direct consideration of r 14.7(d), reach the same conclusion as before. Alternatively, if adjustment is required on this account, an adjustment of five per cent would be sufficient.
[30] Turning to the matters of the late insurance disclosure, Mr Smith’s central position is that Factors’ central pleaded case (a claim to an entitlement of $6.25 million for the hotel) was not compromised through the late disclosure. He further notes that some, but not many, additional documents were discovered and had to be considered by Factors as a result of Scenic’s late insurance disclosure.
[31] Mr Smith identifies Factors’ central complaint relating to the insurance issues as resulting not from Scenic’s late disclosure but from Factor’s tactical decision to persist in its attempt to obtain a judgment in damages against Scenic. He submits that the winding up of Pacific and the division of its assets was always going to be conducted in a separate process, with the liquidation process being able to take account of the parties’ dispute as to the ownership of the insurance proceeds.
[32] Mr Smith submits that the five per cent discount allowed in the costs judgment was appropriate but that, should the Court of Appeal’s observations require a greater adjustment, then a total discount (on both issues) would be in the range of 10 to 15 per cent.
[33] Mr Smith submits there is no basis for disturbing the judgment on costs so far as the recall is concerned, the recall having been necessitated through the original substantive decision going beyond the pleadings in making an order for an account.
Discussion
[34] Mr Smith’s identification of what he submits were the narrower central issues in the proceeding overlook the Court of Appeal’s findings in relation to the costs issues, particularly at [96] of the Court of Appeal judgment where the Court discusses the High Court’s failure to consider a reduction of costs under that provision. The Court of Appeal’s finding, which binds this Court, was:22
Had Scenic accepted the existence of a joint venture between itself and Factors the Court could have focused on the terms and implications of that arrangement and the ambit of the trial would have been much narrower.
[35] In short, Factors obtained against Scenic meaningful relief in the form of the declaration as to the existence of a joint venture. As the Court of Appeal observed, a good deal of time was spent in the High Court addressing the nature of the relationship
22 At [96].
between the parties, with substantial evidence given and extensive submissions made in an effort to determine that issue. The Court of Appeal observed:23
… the fact that Factors owned the hotel throughout and that Scenic provided the management services throughout meant, inevitably, that they were parties to the joint venture. Yet in the High Court (and before us) Scenic forcefully maintained that a joint venture relationship existed only between the parties’ respective subsidiaries, which were not parties to the litigation. …
[36] For these reasons, and contrary to the approach I took in the costs judgment the Court of Appeal’s judgment makes it clear that under r 14.7(d) High Court Rules it is necessary to account for the impact that this issue (pursued by Scenic) had on the trial.
[37] In approaching the next two matters discussed by Mr Smith in his submissions, namely the late insurance disclosure and the costs associated with the recall, it is necessary to bear in mind the Court of Appeal’s direct linking of those issues:24
The second issue (whether the costs associated with the recall should have followed the event) overlaps with the third issue (whether Scenic should be disentitled to costs because of the position it took in relation to the joinder of Pacific and its late disclosure of the insurance claim).
[38] The Court of Appeal’s specific finding was that, notwithstanding my proper consideration of the application of r 14.7(f)(iv) and (g), I had not properly recognised the much more significant impact of Scenic’s late insurance disclosure through its effect on the recall of the first substantive judgment. That, the Court of Appeal held, involved a failure to take a relevant consideration into account.
[39] The Court of Appeal concluded as a matter of fact that earlier disclosure of the insurance arrangements would have assisted in determining the existence of the joint venture and, implicitly, could reasonably have been expected to result in a successful application by Factors to join Pacific had Factors been in a position to make such application at a much earlier point (following full disclosure of the insurance arrangements).
23 At [96].
24 At [97].
[40] The Court of Appeal therefore concluded that “the impact of the insurance policy and claim was felt”.25 The misapprehension involved in the High Court’s making directions for an account “was grounded in the relevance of the insurance proceeds”.26
[41] The Court of Appeal’s reasoning, which binds me, is that the extent to which the recall considered the extended life of the proceedings in the High Court and added to the parties’ costs flowed from the circumstances relating to the disclosure of the insurance policy and claim.27
[42] The Court of Appeal concluded that these combined issues (late disclosure of the insurance arrangements and the time and cost of the recall, combined with the other considerations as to the issues pursued by Scenic):28
… should have been recognised in the assessment of impact that Scenic’s conduct had on the case.
Application of costs principles
[43] In accordance with the Court of Appeal judgment, the usual starting point for the determination of costs (as I have been reminded by counsel) is that all matters relating to the costs of a proceeding are at the discretion of the Court which is seized of the proceeding.29 Importantly, the discretion is not unfettered — it is qualified by the applicable costs rules (r 14.2 to 14.10) and should be consistent with established principles. In this case, the discretion is also qualified by the findings of the Court of Appeal specifically in relation to this proceeding, which bind me in this decision.
Degree of success — r 14.7(d)
[44] Scenic’s failure to accept the existence of a joint venture relationship resulted in the ambit of the trial being significantly broader than it otherwise would have been.30 The costs judgment, in its assessment of the “successful party”, essentially
25 At [100].
26 At [100].
27 At [99]–[101].
28 At [102].
29 High Court Rules, r 14.1(1).
30 Court of Appeal judgment at [96].
treated Scenic as entirely successful. To a large extent, having regard to Factors’ focus on obtaining a damages award against Scenic, that categorisation remains appropriate in terms of the primary principle under r 14.2(1)(a). But, as found by the Court of Appeal, it ignored the costs reduction principle under r 14.7(d).
[45] The issue of whether Scenic was a party to a joint venture was one which (as found by the Court of Appeal) significantly broadened the ambit of the trial.
[46] The Court of Appeal has observed, but for that issue, the ambit of the trial would have been “much narrower”. It is for me, as trial Judge, to determine by reference to my knowledge of the proceeding to what extent the ambit of the trial would have been reduced and how that should be represented in a reduction of what costs would otherwise be payable.
[47] This was an eight-day trial with a relatively complex historical background. Factors’ primary goal was to obtain a damages award against Scenic itself of at least
$6.25 million plus (substantial) interest. The full historical narrative would still have had to be presented in evidence by both parties. The significant saving would have been in relation to some passages of intended evidence-in-chief being removed and some significant time in term of cross-examination. Some modest savings in the time taken in submissions could also have been effected.
[48] The best assessment I can make of the impact on trial of the issue unsuccessfully pursued by Scenic is 15 per cent.
[49] In terms of the Court of Appeal’s judgment, that leaves for consideration also the interconnected issues relating to the costs associated with the recall and the impact of the late disclosure of the insurance claim.31
[50] In the costs judgment I made an allowance, by way of reduction of costs, of five per cent on account of the late disclosure of insurance matters.32 That flowed from a relatively narrow assessment of the impact of late disclosure on the way
31 Court of Appeal judgment at [97].
32 At [19]–[24].
evidence was briefed and the way issues had to be explored at trial.33 The Court of Appeal’s judgment indicates that the assessment of the unnecessary contribution made to the final expense of the proceeding under r 14.7(f)(iv) also needed to take into account the impact Scenic’s conduct had on the trial process given that the insurance policy was relevant to the central issue in the trial. The consequences of its late disclosure permeated the hearing down through to the need for recall of the initial substantive judgment.34
[51] Whereas in the costs judgment I had reduced the costs payable to Scenic by five per cent on account of Scenic’s late disclosure but had still ordered Factors to pay the costs of the interlocutory proceedings relating to recall, the Court of Appeal observed that a principled response to the issues identified on appeal could have been either a larger reduction on the costs awarded to Scenic (that is larger than five per cent) or an order that the costs connected to the recall should lie where they fell.35
[52] The costs awarded in the costs judgment on account of the interlocutory steps relating to recall were calculated (on the basis of 6.6 days allowance) at $15,774.00.
[53] The Court of Appeal’s judgment contains the suggestion that one appropriate part of an ultimate costs decision might be that the costs of the recall steps should lie where they fall. While to some extent that might be considered a pragmatic response to the complications that ultimately arose from Scenic’s late disclosure of the insurance arrangements, I recognise that approach in the circumstances represents a fair outcome in relation to a number of overlapping strands flowing from the related issues of late disclosure and the need for the initial substantive judgment to be recalled.
[54] In the exercise of my discretion, I put to one side my previous approach (of allowing a five per cent reduction on account of the late disclosure of insurance arrangements) and instead will order that costs lie where they fall on the steps taken in relation to the recall of the initial substantive judgment.
33 At [24].
34 Court of Appeal judgment at [98]–[102].
35 At [102].
[55] Apart from on these issues which I have discussed, I view the remaining aspects of the costs judgment as being the appropriate outcome in relation to the costs of the proceedings in this Court.
Outcome
[56] I order the costs and disbursements orders made in this Court’s judgment dated 16 September 2020 ([2020] NZHC 2407) are confirmed except as follows:
(a)the costs payable to the first defendant thereunder are reduced by 15 per cent; and
(b)the costs orders made on the “recall hearing” and the “supplementary hearing” are quashed and, instead, there is no order as to the costs of the recall hearing and the supplementary hearing.
[57] Leave is reserved to counsel, in the event that any issue arises as to the consequential calculations, to raise the matter with the Court by memorandum.
Osborne J
Solicitors:
KooTelle Lawyers, Auckland Meares Williams, Christchurch
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