Dempsey Wood Civil Limited v Gapes

[2021] NZHC 2941

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2016-404-1839

[2021] NZHC 2941

UNDER

the Companies Act 1993 and the Fair Trading Act 1986

BETWEEN

DEMPSEY WOOD CIVIL LIMITED

Plaintiff

AND

ANTHONY JOHN GAPES

Defendant

Hearing:	On the papers
Appearances:	E St John and SP Maloney for the Plaintiff JWA Johnson and WL Porter for the Defendant
Judgment:	2 November 2021

JUDGMENT (NO. 3) OF FITZGERALD J

[As to costs]

This judgment was delivered by me on 2 November 2021 at 11.00am, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors:        Wynn Williams, Auckland

Alan Jones Law Ltd, Auckland

To:E St John, Auckland S Maloney, Auckland

DEMPSEY WOOD CIVIL LTD v GAPES [2021] NZHC 2941 [2 November 2021]

Introduction

[1]    In my substantive judgment delivered on 10 September 2021, I determined Dempsey Wood’s claims against Mr Gapes.1 I concluded that Mr Gapes had breached his director’s duties to Panama Road Developments Limited (PRDL), a company of which Mr Gapes was the sole director. In particular, I found that Mr Gapes had breached his duties under ss 135 and 136 of the Companies Act 1993 (the Act), though I dismissed Dempsey Wood’s claim that Mr Gapes had also breached his duties under s 131 of the Act. Dempsey Wood’s claim pursuant to s 137 of the Act was not pursued.

[2]    Dempsey Wood adopted  a  breach  date  on  its  claims  under  the  Act  of  15 October 2015. I adopted a breach date of 13 November 2015. I also held that the losses said to flow from Mr Gapes’ breaches, as pleaded by Dempsey Wood, were limited to unpaid amounts due to Dempsey Wood (that is, rather than due to unsecured creditors generally in PRDL’s liquidation). Further, and exercising my discretion pursuant to s 301 of the Act, I ordered that Mr Gapes contribute only approximately one-third of the unpaid amounts due to Dempsey Wood.

[3]    The consequence of those findings was a much reduced award pursuant  to    s 301 of the Act ($100,000) than that sought by Dempsey Wood ($1.4 million plus the costs and disbursements of PRDL’s liquidation).

[4]    Dempsey Wood also sued Mr Gapes under the Fair Trading Act 1986 (the FTA). The FTA claim was advanced in Dempsey Wood’s closing submissions as its primary claim. Dempsey Wood said that an email communication sent by Mr Gapes to Dempsey Wood on 12 November 2015 was misleading and deceptive and therefore in breach of s 9 of the FTA (in that it wrongly represented to Dempsey Wood that funds were available to PRDL to continue to pay Dempsey Wood). I accepted Dempsey Wood’s FTA claim, and ordered that Mr Gapes pay compensation to Dempsey Wood of approximately $286,000.

[5]    At the conclusion of my substantive judgment, I encouraged the parties to seek to agree costs. I indicated a preliminary and non-binding view that:

1      Dempsey Wood Civil Ltd v Gapes [2021] NZHC 2362.

(a)Dempsey Wood was the successful party overall, though a costs award in its favour ought to be reduced somewhat because it has not succeeded on all aspects of its claims, particularly those under the Act; and

(b)costs ought to be assessed on a 2B basis.

[6]    The parties have now conferred on costs. There is no dispute that Dempsey Wood is the successful party overall and a costs award ought to be made in its favour. While there is a degree of agreement on the content and quantum of that award, the parties have not been able to agree the following:

(a)Dempsey Wood’s claim for scale costs in relation to a non-party discovery application it made against PRDL’s receivers and liquidators in 2017;

(b)Dempsey Wood’s position that the step for inspection of Mr Gapes’ documents produced by way of discovery should be categorised on a 2C rather than a 2B basis;

(c)Dempsey Wood’s claim for second counsel’s appearance at the hearing;

(d)Dempsey Wood’s claim for scale costs in relation to various memoranda filed over the life of the proceedings;

(e)whether there should be a reduction to the scale costs award in Dempsey Wood’s favour, given it was not successful on all of its claims; or conversely, whether there ought to be an increase in the scale costs award as a result of pre-trial settlement offers which were exchanged between the parties; and

(f)whether Mr Gapes ought to pay for Dempsey Wood’s expert fees (claimed as disbursements).

[7]I address each of these disputed matters in turn.

Costs of third party discovery application

[8]    Dempsey Wood claims $2,390 in respect of a non-party discovery application against PRDL’s receivers and liquidators in late July 2017. There was no opposition to the application (by either the third parties or Mr Gapes) and Judge Sargisson made the orders on 18 August 2017. The orders included that Dempsey Wood meet the reasonable costs of each non-party in complying with the orders. The orders did not include any orders as to the costs of Dempsey Wood’s application itself.

[9]    As far as I can discern from the file, no documents were produced by the third parties in response to that application. Indeed, it appears a further non-party discovery application was made against the receivers and liquidators at a later point in time.2

[10]   Counsel for Mr Gapes note that r 14.8 provides that, as a general rule, costs on interlocutory applications “must be fixed in accordance with these rules when the application is determined”. Counsel correctly note that this rule reflects that the merits of interlocutory applications and the substantive proceeding may differ. Counsel submit that if the costs of the non-party discovery application were sought against Mr Gapes (which they were not), the arguments now advanced by Dempsey Wood should have been made at the time the application was determined. Counsel submit there is no good reason why the general rule that costs on interlocutory applications are to be fixed at the time the application is determined should be departed from in this case, and thus it is now too late for Dempsey Wood to claim costs of the application. Counsel also note that the authorities relied on by Dempsey Wood do not support its position, because they address different issues, such as costs as between the applicant and the non-party concerned (where the non-party has opposed the application), and seeking to recover, as a disbursement in the substantive proceeding, amounts paid by the applicant to the non-party to reimburse the non-party for its costs of complying with the discovery orders.

[11]   While it is correct that, as a general rule, costs of interlocutory applications ought to be fixed at the time the application is determined, there is no express rule to the effect that if they are not, they cannot be dealt with in the context of costs of the

2      Costs are not sought by Dempsey Wood for this later application.

substantive proceeding. I was not referred to any authority to that effect. I nevertheless agree with counsel for Mr Gapes that it may be too late for Dempsey Wood to seek costs on the application, at least as between Dempsey Wood and the non-parties. Given the application was made and determined approximately four years ago, the non-parties would be entitled to proceed on the reasonable assumption that Dempsey Wood did not pursue costs against them.

[12]   But the position is different, in my view, in relation to costs as between Dempsey Wood and Mr Gapes. It is correct that Dempsey Wood did not seek costs on the application against Mr Gapes at the time. But that is understandable. The application was not directed to Mr Gapes, but to the non-parties. In all likelihood, had costs against Mr Gapes been sought at the time, they would have been reserved into the substantive proceeding.

[13]   There is no suggestion made on behalf of Mr Gapes that the application for non-party discovery was unnecessary or unwarranted. As noted, it was granted without opposition. And it would seem logical in a case such as this for relevant documents to be sought from PRDL’s liquidators and/or receivers. Indeed, once documents were produced by those parties (as noted, on a later non-party discovery application), a number of those documents were relied on at the substantive hearing.

[14]   There is nothing, therefore, to suggest that the application for non-party discovery was anything other than a proper and reasonable step taken in these proceedings. On that basis, I do not see any reason why the costs of that step ought to be excluded from the costs award in Dempsey Wood’s favour.

[15]   Scale 2B costs on the non-party discovery application are accordingly to form part of the costs award in Dempsey Wood’s favour. This will also include the associated disbursements.

Second counsel’s appearance at the hearing

[16]Dempsey Wood claims $9,560 for second counsel’s appearance at the hearing.

[17]   Counsel for Mr Gapes rightly note that the appropriate question is not whether second counsel was used, but whether it is reasonable that the other side pays the cost of second counsel.3

[18]   These proceedings were moderately complex, at least in terms of some of the legal and factual issues arising on the Companies Act claims. They were also reasonably document heavy, but not particularly so in the context of modern civil litigation. A hard copy common bundle was used at the hearing and was easily accommodated in eight spiral bound volumes. Mr St John, as lead counsel, conducted all advocacy.

[19]   I do not doubt that it was prudent and reasonable for Dempsey Wood to have engaged junior counsel to assist Mr St John. That no doubt led to cost efficiencies in the work being carried out on its behalf. But as noted, that is a different question to whether the opposing party ought to pay the cost of second counsel at the hearing.

[20]   I am not persuaded that the threshold for Mr Gapes to pay the cost of second counsel at the hearing has been met. The proceeding was moderately, but not particularly, complex. Junior counsel was not required to oversee and manage an electronic casebook in court. Junior counsel did not engage in any advocacy. Without in any way diminishing the obvious benefit to Dempsey Wood of junior counsel being engaged generally, or the appropriateness of junior counsel appearing at the hearing, this is not one of those cases where it is appropriate to certify for second counsel for costs purposes.

Various memoranda

[21]   Dempsey Wood claims costs in relation to a number of memoranda filed over the life of the proceeding, including joint memoranda, which it accepts ought to be claimed on reduced basis (namely 50 per cent of what would otherwise be claimable). That reduction is sensible.

3      Lifestyles Investment Group v Coral Investments Securities Limited [2017] NZHC 2122 at [11].

[22]   Mr Gapes objects to two joint memoranda (prepared by his counsel) being included in the costs award on this (reduced) basis:

(a)a joint memorandum dated 14 August 2020, being a quarter page in length advising the Court that no further matters required its attention; and

(b)a memorandum dated 8 December 2020, which proposed revised timetable orders, necessitated by Dempsey Wood’s briefs of evidence being served considerably outside the ordered timetable.4

[23]   Once the 50 per cent reduction is taken into account, the dispute between the parties over these memoranda totals $956.5

[24]   As to the memorandum dated 14 August 2020, rather than exclude this from the costs award, I make an order that it be included in the costs award, but assessed for costs purposes on a 2A basis (reduced by 50 per cent as has been agreed).

[25]   I do not consider it appropriate for Dempsey Wood to recover costs for the memorandum dated 8 December 2020, because it was only needed because Dempsey Wood had breached timetable orders. It is excluded from the costs award.

[26]   Mr Gapes also objects to the costs award including the cost of a memorandum dated 18 May 2019, seeking an adjournment pending an application being made to restore PRDL to the Register. Counsel submit that this appears to have come about because Dempsey Wood did not object to PRDL being removed from the Register. On that basis, I agree that the cost of this memorandum should also be excluded from the costs award.

4      There is no evidence that Dempsey Wood sought an extension of time prior to the Court’s order expiring, which would have been the appropriate step to be taken.

5      $478 x 2.

Inspection of discovery documents

[27]   As noted, Dempsey Wood claims this step on a band 2C basis, rather than a 2B basis.

[28]   I do not see any reason to depart from assessment on a 2B basis. As noted, the documents in this matter were not particularly voluminous, and there is nothing to suggest that the amount of documents requiring inspection was like that encountered in very significant and large scale commercial litigation (where band C might generally be considered appropriate). I also take into account that Dempsey Wood has claimed the costs of providing its own discovery (which counsel for Mr Gapes submit extended to only around 100 documents) on a 2B basis. The steps effectively balance each other out.

Should Dempsey Wood’s costs award be reduced?

[29]   As noted, I expressed a preliminary and non-binding view that the costs award in Dempsey Wood’s favour might warrant reduction, given Dempsey Wood was not successful on all of its pleaded claims (see [1] to [3] above).

[30]   On reflection, however, I do not consider that a reduction in costs is appropriate.

[31]   Rule 14.7 provides that the court may reduce the costs otherwise payable to the successful party if “that party has failed in relation to a cause of action or issue which significantly increased the costs of the other party opposing costs” (emphasis added).6 Simply being unsuccessful on a cause of action or issue per se, where pursuing that cause of action or issue has not significantly increased the costs incurred by the opposing party, does not warrant a reduction in costs.

[32]   Apart from some interesting legal issues on aspects of the Companies Act claims, this case largely turned on its facts. Given the broad factual context was key to both the Companies Act and FTA claims, the majority of my substantive judgment dealt with the facts. All of the evidence and submissions on those facts would have

6      High Court Rules 2016, r 14.7(d).

needed to have been called and made even if the ss 131 and 137 claims had not been pursued, and irrespective of the breach date or losses claimed by Dempsey Wood. In other words, this is not the kind of case where significant costs would have been saved if Dempsey Wood did not pursue those aspects of its Companies Act claims on which it was not successful.7

[33]   Further, the broad factual context was also relevant to the FTA claim, though I accept that if that had been the only claim, the factual background could have been narrowed somewhat, but probably not significantly. But as noted, Dempsey Wood was successful, albeit to a lesser extent than pleaded, on its ss 135 and 136 claims in any event.

Should there be an increase in costs?

[34]   On 25 February 2021, five working days prior to the trial, Mr Gapes made a “without prejudice save as to costs” offer to settle the proceedings for a payment by him of $100,000 in six monthly instalments, commencing at the end of March 2021 with a final payment of $20,000 at the end of August 2021. The offer was said to remain open until 5.00pm the following Wednesday, 3 March 2021.

[35]   The letter communicating the offer contained a lot of detail on Mr Gapes’ views of the merits of Dempsey Wood’s claims. Some of the matters raised were matters which led me to make a s 301 award which was considerably lower than that sought by Dempsey Wood.

[36]   Counsel for Dempsey Wood  responded  to  the  offer  the  following  day,  26 February 2021, confirming that Dempsey Wood would accept $250,000 by way of settlement, which could be paid by Mr Gapes in the same monthly instalments proposed in his offer, but over a longer period of time. The offer proposed security for those payments as being “a confession of claim for the full amount”. The offer provided that settlement would formally be of the FTA cause of action (presumably to

7      It was clear from the outset that the real contest on the Companies Act claims lay in the claims brought pursuant to ss 135 and 136. There was relatively little time spent in legal argument on the ss 131 or 137 claims. Those claims would, in my view, have resulted in a very modest incremental increase in Mr Gapes’ costs.

ensure that the settlement amount would be paid to Dempsey Wood rather than to PRDL). The offer was to remain open for acceptance until 11.00am, Monday 5 March 2021. Counsel for Dempsey Wood noted “you have left late settlement discussions. We have to prepare for trial”.

[37]   Mr Gapes responded to that offer on 3 March 2021 and rejected it. His counsel conveyed a further offer by Mr Gapes, namely a payment of $120,000, again paid by way of six monthly instalments. Dempsey Wood obviously rejected that offer, though no further correspondence from this chain of settlement offers is before the Court.

[38]   In light of its offer to settle for $250,000 (being less than what it has been awarded on the FTA claim at trial), Dempsey Wood seeks an uplift on scale costs of 50 per cent on those steps taken by Dempsey Wood after 26 February 2021. Counsel for Dempsey Wood submit that once interest and costs are fixed, Mr Gapes will face a judgment of close to $500,000, or twice what Dempsey Wood offered on 26 February 2021. Counsel submit that Mr Gapes was in the best possible position, less than a week prior to trial, to assess the merits of each party’s case. Counsel submit that if Mr Gapes had accepted the offer, the expense of the trial would have been avoided entirely, and Mr Gapes would have been in a better position than post-judgment.

[39]   Counsel for Mr Gapes submit that Dempsey Wood’s pre-trial offer is not relevant to the assessment of costs. They note that it was made only five working days out from trial, and refer to commentary in McGechan on Procedure to the effect that the later an offer is made, the less its impact on costs, and very late offers will have little or no impact.8 Counsel also submit that, given the Companies Act award is to be paid to PRDL (and any recovery by Dempsey Wood as a result of that payment is to be offset against the FTA claim), the maximum Dempsey Wood will recover is

$286,295 (plus costs and interest). Counsel submit that given the reasonable likelihood of Dempsey Wood’s actual costs exceeding its total recovery, the concession involved by Dempsey Wood in its settlement offer was, at best, minor. Counsel for Mr Gapes submit that this, and the relative legal risk of the parties at the time the offer was made, underscores why rejection of the offer was not unreasonable.

8      Andrew Beck and others (ed) McGechan on Procedure (online ed, Thomson Reuters) at [HCR14.10.02(2)].

[40]   I do not consider it was unreasonable for Mr Gapes to reject Dempsey Wood’s offer at the time it was made.

[41]   As a preliminary point, while the timing of the offer will usually be relevant, I do not agree that the picture is as “black and white” as the commentary in McGechan on Procedure perhaps suggests, and that very late offers will have little or no impact. Nor do I consider it helpful to carry out a comparative assessment across decided cases of how many days out from trial a particular offer was made. Context will be crucial and each case must be considered on its own merits. For example, an offer made three working days out from a one day fixture may be less relevant to costs than an offer made three working days out from a four week fixture. There is considerably more to be “saved” by the parties in the latter scenario. An offer made very late in the day on the Friday before the Monday on which the substantive hearing is due to commence, and which is only open for consideration until 9am on that Monday morning, may well be disregarded (the party receiving the offer being under “extreme time pressure” to consider and make a decision on it).9

[42]   I take into account that Dempsey Wood itself does not appear to have triggered any settlement discussions in this case, its offer being made in response to an offer made by Mr Gapes. So while Mr Gapes’ offer was made late and close to trial (as counsel for Dempsey Wood noted in his response to that offer), so too was Dempsey Wood’s own offer.

[43]   That Mr Gapes was prepared to engage in settlement proposals should also be taken into account. This is not a scenario, for example, where a plaintiff has made one or more reasonable offers to settle a proceeding and a defendant has either resolutely ignored them or responded with wholly unreasonable offers. I also take into account that, as the content of my substantive judgment makes clear, the issues in this case were not entirely straightforward, and certainly not as stark or as obvious as Dempsey Wood suggested (which was presumably reflected in the level of its own settlement offer versus its claim overall, and its willingness to accept payment over a substantial period of time).

9      Bloor v IAG New Zealand Ltd HC Rotorua CIV-2004-463-425, 19 March 2010 at [18].

[44]   Related to this is that a number of the matters traversed in Mr Gapes’ counsel’s letter accompanying his first offer were the basis upon which I ultimately awarded a much reduced s 301 award than Dempsey Wood sought. Aspects of Dempsey Wood’s Companies Act claims were, ultimately, untenable. It was therefore not unreasonable for Mr Gapes to wish to test those issues at trial. And while Dempsey Wood was successful on its FTA claim, it was only advanced as the “primary” claim in closing argument, after, it seems, some of the difficulties in its Companies Act claims had been exposed.

[45]   Finally, as noted earlier, a term of Dempsey Wood’s offer was that security for payment of the settlement amount over time was “a confession of claim for the full amount”, which presumably included the full amount claimed by Dempsey Wood, including its Companies Act claims ($1.4 million). Thus, if Mr Gapes had missed a scheduled payment, he would be exposed to the full amount claimed in Dempsey Wood’s proceeding, in circumstances where the full amount claimed under the Companies Act claims was unrealistic.

[46]   Standing back, given the timing of the offer, its terms, the amount (not significantly less than what was claimed by Dempsey Wood under the FTA claim), the obvious difficulties with aspects of Dempsey Wood’s Companies Act claims, and that Mr Gapes was also willing to participate in settlement negotiations, I do not consider it was unreasonable for Mr Gapes to have rejected the offer at the time it was made.

[47]There will accordingly be no increase on the scale costs award.

Disbursements

[48]Dempsey Wood claims disbursements of $64,579.28, which include

$45,645.79 in expert fees.

[49]   Counsel for Mr Gapes submit that given the concerns I expressed in relation to the form of Dempsey Wood’s experts’ written briefs of evidence,10 I should exercise my discretion and refuse to award any disbursements for those experts’ fees. Counsel

10 Substantive judgment, above n 1, at [144].

submit that all matters as to costs are at the discretion of the court, and the determination of cost claims is one way in which the court can ensure compliance with the rules of court.

[50]   I am not persuaded that the award of disbursements should take on an element of “sanction” or “discipline” reflecting the comments I made on the form of the experts’ briefs of evidence.

[51]   First, the amounts are being claimed by way of disbursement (not as costs). It is only the question of costs which is subject to the overriding discretion contained in r 14.1(1), r 14.(2) stating that rr 14.2 to 14.10 are subject to that overriding discretion. Rule 14.11 is not referred to in that context (though contains its own directive that the application of that rule is at the discretion of the court). Nor is r 14.12, which concerns disbursements. Rules 14.13 (proceedings within the jurisdiction of the District Court),

14.14 (joint and several liability for costs), 14.15 (defendants defending separately),

14.16 (claim and counterclaim both established) and 14.17 (set-off if costs allowed to both parties) also all contain their own “self-contained” discretion, given each of those rules sets out a “default” position on costs “unless the court otherwise directs” (or words to a similar effect).

[52]   That is not to say, however, that there is no residual discretion when it comes to disbursements, including experts’ fees. Ultimately, the disbursement must be of a class approved by the court for the proceeding,11 the court must be satisfied the disbursement was reasonably necessary for the conduct of the proceeding12 and is reasonable in amount.13 A disbursement may also be disallowed or reduced if it is disproportionate in the circumstances of the proceeding.14 Expert evidence that was blatantly partisan and biased, for example, would be unlikely to be considered reasonably necessary for the conduct of any proceeding.

[53]   There is no suggestion that it was unreasonable for the experts to be called at all by Dempsey Wood, or that their evidence generally was not relevant to the matters

11     Rule 14.12(2)(a)(i).

12     Rule 14.12(2)(c).

13     Rule 14.12(2)(d).

14     Rule 14.12(3).

in  issue.     Nor is it suggested that the expert fees are disproportionate in the circumstances of the proceeding.

[54]   Counsel for Mr Gapes does submit, however, that if expert fees are to be awarded by way of disbursements, only one of the experts’ fees ought to be payable, to reflect that aspects of their briefs of evidence were materially the same, which in turn demonstrates that both experts’ evidence was not reasonably necessary for the conduct of the proceedings.

[55]   I do not agree. Given the nature of the issues arising in the case, it was not unreasonable for Dempsey Wood to call both experts to give evidence, and indeed one expert’s evidence traversed a broader range of matters than the other’s. Further, the fact that some parts of the briefs of evidence were written in the same terms (likely by counsel) means that their actual fees are likely to be lower than would have otherwise been the case, namely if each had been charged with the drafting of all aspects of their brief of evidence from the outset.

[56]   I accordingly do not make a reduction in the amount claimed for the expert witness fees.

[57]   The final matter in issue concerns three sealing fees (of $50 each), which relate to costs awards made earlier in the proceedings. Counsel for Mr Gapes submit that as with other interlocutory matters, these ought to have been claimed at the time.

[58]   There is no information before the Court as to what these sealing fees relate to. For example, it appears that the sealing fee claimed for 30 January 2020 might have already been included in those costs awarded by the Court on 3 February 2020, which included a sealing fee. The only earlier order on costs around that period was made on 18 December 2019, which again already included a sealing fee. There does not appear to be any relevant order as to costs on 21 February 2020, being the date of the remaining sealing fee claimed.

[59]   Ultimately, it is for the party seeking costs and disbursements to put all necessary information before the Court so it can be satisfied that those costs and/or

disbursements ought to be awarded. I do not have sufficient information in relation to the three challenged sealing fees (28 August 2019, 30 January 2020 and 21 February 2020). They are to be excluded from the costs award.

Result

[60]   There is a costs award in Dempsey Wood’s favour in accordance with the schedule attached to its costs submissions dated 1 October 2020, but with the adjustments required by this judgment.

Fitzgerald J