DHC Assets Limited v Arnerich
[2020] NZHC 1133
•29 April 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-307
[2020] NZHC 1133
UNDER The Companies Act 1993 BETWEEN
DHC ASSETS LIMITED
Plaintiff
AND
ANTONY IVO ARNERICH
Defendant
Hearing: On the papers Counsel:
F J Thorp & L Turner for Plaintiff
J D McBride & A J Steel for Defendant
Judgment:
29 April 2020
JUDGMENT OF PAUL DAVISON J
[Re Costs]
This judgment was delivered by me on 29 April 2020 at 11:00 am pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors:
Duthie Whyte, Auckland Doug Cowan, Auckland
DHC ASSETS LTD v ARNERICH [2020] NZHC 1133 [29 April 2020]
Introduction
[1] DHC Assets Limited (the plaintiff) applies for costs and disbursements totalling $578,139, of which $150,557 is for disbursements. The plaintiff succeeded in its claim brought against Anthony Arnerich (the defendant) in which it alleged that as the director of Vaco Investments (Lincoln Road) Ltd, he breached his duty of good faith owed to the plaintiff as a creditor of the company. By my judgment delivered on 2 October 2019 the defendant, Anthony Arnerich was ordered to pay the plaintiff the sum of $367,768.12 together with interest from the date of the adjudication, compounding monthly at the rate of 12.4 percent.1
[2]In its claim the plaintiff alleged that it was an unpaid creditor of Vaco for
$1,088,156 together with interest. Accordingly it has succeeded in establishing just over a third of the amount it claimed.
[3] The plaintiff seeks an award of costs calculated on the basis that all steps taken by it following the pre-trial rulings made by Associate Judge Bell on 26 July 2018 be reclassified from Category 2 to Category 3. In the alternative, the plaintiff applies for many of the steps taken after 26 July 20182 to be classified on a Band C basis. The plaintiff also seeks increased costs by way of a 50 per cent uplift to be applied to all steps taken in the proceeding, or alternatively to be applied to a number of specific steps taken in the proceeding.
[4] While accepting that the plaintiff is entitled to an award of costs, the defendant disputes the amounts claimed by the plaintiff. The defendant says that at a pre-trial stage the proceedings were classified as Category 2, and that the parties had thereafter proceeded to trial on that basis. The defendant opposes any reclassification of the proceeding or any steps as Category 3, and opposes any uplift of the plaintiff’s scale costs. To the contrary, the defendant says that the Court should reduce the plaintiff’s costs by 25 percent. The defendant also disputes several of the amounts claimed as disbursements by the plaintiff relating to expert witness costs, and the outsourcing of work related to discovery and the engagement of assistance to operate the electronic bundle during the trial. Applying this approach, the defendant says that the plaintiff is
1 DHC Assets Ltd v Arnerich [2019] NZHC 1695 at [353].
2 Case management conference Minute of Associate Judge Bell, 26 July 2018.
entitled to costs of $68,238, together with disbursements of $36,199.24. A total of
$104,437.24.
[5] Accordingly there is a significant difference between the parties with the defendant’s assessment being less than one-fifth of the total sum claimed by the plaintiff.
The categorisation of the proceeding
[6] Rule 14.3 of the High Court Rules 2016 (the Rules) provides for proceedings to be classified as falling within one of three categories according to the degree of complexity involved in the proceeding and the experience or skill level required of counsel by reason of that complexity. The court may determine a proceeding’s Category in advance of trial and that categorisation will thereafter apply to all subsequent determinations of costs in the proceeding unless there are special reasons to the contrary.3
[7] The Court had determined that the proceeding fell within Category 2 well prior to trial as noted by Associate Judge Bell in his Minute issued after the first case management conference which was held following the dismissal of the plaintiff’s application for summary judgment.4 The categorization was subsequently confirmed in August 2018 when the Court dealt with the plaintiff’s application for further discovery and Associate Judge Bell noted that the plaintiff accepted that Category 2 was appropriate.5
The plaintiff’s submissions regarding recategorization
[8] The plaintiff submits that where a director has been found to have breached his duties to a creditor of the company, and the creditor is forced to pursue litigation in order to establish its entitlement, indemnity or increased costs in respect of the whole of the proceeding may be awarded. In support of its submission the plaintiff cites Mako
3 High Court Rules 2016, r 14.3.
4 Minute of Associate Judge Bell (1 November 2017) at [1].
5 Minute of Associate Judge Bell (8 August 2018) at [3].
Holdings Ltd (in liq) v Crimp6 and Wilburn Furniture and Restorations Ltd (in liq) v Gledhill,7 as examples.
[9] As I have noted, the plaintiff does not seek a general re-categorization of the whole proceeding. However it says that the complexity of the case had changed significantly by the time that Associate Judge Bell issued his first case management conference Minute on 26 July 2018, and that all steps taken after that date should be recategorized as Category 3, including the steps relating to the preparation of the plaintiff’s third amended statement of claim, preparation of the plaintiff’s witness briefs of evidence, preparation for the hearing, and conduct of the hearing during the 12 day trial.
[10] The plaintiff says that by the time of the 26 July 2018 case management conference, the proceeding had become significantly more complex, both factually and legally, compared to when the initial statement of claim was filed in March 2017. The plaintiff says that the increased complexity was due in large part to the defendant’s ongoing strategy directed to thwarting and frustrating the plaintiff’s efforts to prosecute its claim.
[11] The plaintiff says that in its original statement of claim on which it applied for summary judgment, it alleged three causes of action, which alleged that the defendant had breached his director’s duties under s 131 of the Companies Act 1993. The causes of action alleged that the defendant had misapplied Vaco’s funds by procuring: Vaco to purchase the Lincoln Road property from a related company at an overvalue; Vaco to pay and distribute the proceeds of sale of Lincoln Road to associated interests of the defendant; and by procuring Vaco to pay out retention monies which it had wrongfully received from the ANZ bank. The summary judgment application was dismissed by Associate Judge Doogue in his judgment of 7 July 2017.8 However, the plaintiff notes that it had earlier elected not to pursue its application for summary judgment in relation to its first cause of action after the defendant had filed an affidavit in opposition, and which contained assertions which directly conflicted with the
6 Mako Holdings Ltd (in liq) v Crimp HC Invercargill CP 23/99, 28 November 2000.
7 Wilburn Furniture and Restorations Ltd (in liq) v Gledhill [2016] NZHC 331.
8 DHC Assets Ltd v Arnerich [2017] NZHC 1460.
evidence of Vaco’s liquidator on key issues including, the amount actually paid for the Lincoln Road property, the amount of the sale proceeds paid to the defendant’s interests and the timing of the payments.
[12] The plaintiff says that following the defendant’s commencement of separate proceedings against the plaintiff, Vaco and the liquidator personally, the defendant said in his memorandum filed in relation to the first case management conference in this proceeding, that the extent to which Vaco actually owed money to the plaintiff would be resolved by the arbitration which had been commenced between the plaintiff and Vaco. The plaintiff notes that at the conclusion of the case management conference, Associate Judge Bell indicated his agreement with the position advanced on behalf of the defendant that the adjudication determination which had been conducted under the Construction Contracts Act 2002 and any award that would be made in the arbitration, would not bind the defendant because he had not been a party to the adjudication or arbitration, and notwithstanding that the defendant had been given the opportunity of making submissions on Vaco’s behalf to the adjudicator, and that the determination had not been challenged. The plaintiff notes that Associate Judge Bell directed the plaintiff to file a fresh statement of claim in order to prove afresh how much was owing under the building contract.
[13] The plaintiff says that the defendant’s refusal to accept that either he personally or Vaco was bound by the adjudicator’s determination, substantially increased the scope of this proceeding, as all of the plaintiff’s claims against Vaco under the construction contract had to be pleaded and proved in this proceeding, against the possibility that the defendant was not estopped from denying the adjudication findings were binding on both Vaco and himself in this proceeding.
[14] The plaintiff further says that Associate Judge Doogue’s observation in his judgment in July 2017, that the issue of whether the Lincoln Road property was owned by the defendant’s trust, rather than Vaco, was of critical importance,9 also contributed to the legal complexity of the case. This finding led the plaintiff to make applications for further and better discovery, including for non-party discovery from the ANZ Bank
9 At [15] – [18].
and from the defendant and Vaco’s solicitors. The plaintiff says that in his judgment dealing with the application for further discovery, Associate Judge Bell respectfully disagreed with Associate Judge Doogue’s observations as to the significance of whether Vaco held the Lincoln Road property as a corporate trustee.10 Associate Judge Bell further noted that the defendant himself no longer supported Associate Judge Doogue’s reasoning, and that the defendant’s counsel accepted that trusteeship would not put the proceeds of sale of the property out of reach of the plaintiff as a creditor of Vaco.11 The plaintiff says that notwithstanding the defendant’s earlier position, during the hearing of this matter the defendant sought to resile from the concession he had made before Associate Judge Bell, which resulted in the plaintiff being required to address this issue in cross-examination and in its closing submissions.
[15] The plaintiff says that the situation whereby this proceeding would come to trial before the 1926 proceeding and arbitration proceeding were determined led the plaintiff to request a case management conference to address the issues arising from the co-existence of the two proceedings, and the fact that neither the liquidator or Vaco were parties to the present proceeding. In its memorandum for this case management conference the plaintiff said that it intended to file a further amended statement of claim in which it would amend its claims to include reference to the further payments totalling approximately $690,000 made by Vaco revealed by the further discovery, and would also address the issue of joinder of both the liquidator and Vaco.
[16] I note that the plaintiff also relies on the complexities caused by the inter- relationship of this proceeding and the 1926 proceeding, and the yet to be determined arbitration commenced under the construction contract. The plaintiff notes that in his Minute dated 26 July 2018, Associate Judge Bell dismissed an oral application made by the plaintiff for joinder, and determined that the proceeding could continue without the liquidator being joined. The liquidator subsequently filed a memorandum in this proceeding in which she advised that she was willing to abide the decision of the Court on the amount that is found to be due under the construction contract, which was later confirmed by her solicitors in correspondence. The plaintiff further notes however that the Court’s determination that the plaintiff’s claims against Vaco for money owed
10 At [31].
11 At [31].
under the construction contract were required to be established in accordance with the terms of the construction contract by means of adjudication or arbitration and the Court in this proceeding does not have jurisdiction to undertake such a determination, meant that the ruling of Associate Judge Bell that the proceeding could continue without the liquidator being joined on the basis that any judgment would be binding on the parties as to the plaintiff’s standing as a creditor of Vaco and as to the amount, was effectively overruled.
[17] The plaintiff submits that the increased level of complexity of the proceeding was recognised and referred to by Palmer J in a Minute issued following the first of two pre-trial conferences held on 26 September 2018 in which he said:
This is a complicated commercial dispute about alleged breaches of directors’ duties which appears to be a meal in the making. There is a related parallel arbitration between DHC Assets Ltd (DHC) and Mr Arnerich’s company,
Vaco Ltd, in liquidation…
[18] The plaintiff also points to a number of other matters as confirming the increased complexity of the proceeding.
(a)The 12 day duration of the trial which included two days for the hearing of closing submissions.
(b)The one day hearing of the preliminary issue of whether the plaintiff was a creditor of Vaco, which required the preparation of separate written submissions.
(c)Both parties were represented by two counsel.
(d)The Court sittings commencing early and sitting late to ensure that the hearing could be completed within the time allocated for the fixture.
(e)The size of the physical and electronic bundle comprising 22 paginated volumes consisting of 12,989 pages; a volume of adjudication materials consisting of 1,692 pages; three pleadings folders containing 53
documents; and documents relating to the 1926 proceeding and arbitration proceeding.
(f)The sheer volume of documentation comprised in the bundle made it necessary for the plaintiff to establish an electronic courtroom and engage the assistance of professional consultants.
(g)The volume of evidence produced as illustrated by the plaintiff’s principal witness’s brief being 50 pages in length, and the defendant’s own witness brief being 104 pages in length, and the oral evidence comprising 955 pages.
(h)The detailed and hyperlinked chronology filed by the plaintiff.
(i)The length of the closing submissions each being over 100 pages in length and containing numerous hyperlinked references to documents and evidence.
(j)The length of the Court’s judgment comprising 354 paragraphs.
[19] The plaintiff submits that these matters all illustrate the increased level of complexity of the proceedings that arose following the pre-trial rulings made by Associate Judge Bell on 26 July 2018. The plaintiff relies on r 14.3(2) and submits that the increased level of complexity evident from the matters it has identified amount to special reasons justifying the Court recategorizing the proceeding as Category 3 for all steps from 26 July 2018 through to the end of the trial. The plaintiff says that during the preparation phase that followed the rulings contained in Associate Judge Bell’s 26 July 2018 Minute, increasingly complex factual and legal issues arose which made the proceeding significantly more complex than was the case when the decision was made to fix the proceeding as Category 2. The plaintiff cites J v J12 as an example where after delivering judgment the Court recategorized the proceeding as Category 3 because unanticipated complex legal and factual issues had arisen during the pre-trial preparation phase which resulted in extensive medical expert evidence being required.
12 J v J [2013] NZHC 1822.
There the Court observed that “continuation of the earlier 2B categorization would be grossly unfair to the plaintiff.”13
The defendant’s submissions regarding recategorization
[20] The defendant opposes the plaintiff’s application for a recategorization of the proceeding as Category 3. The defendant says that at the first case management conference on 30 October 2017, the court rejected the plaintiff’s contention that the proceeding was complex and should be classified and Category 3, and the proceeding was accordingly classified as Category 2 for the purposes of r 14.3. The defendant notes that the Category 2 classification was confirmed in August 2018 when, in the context of the plaintiff’s unsuccessful application for further discovery, the plaintiff said in its memorandum that scale 2B was the appropriate categorization for the proceedings, but nevertheless sought a ruling that costs on the unsuccessful discovery application should lie where they fell. The defendant notes that Associate Judge Bell rejected the plaintiff’s submission that costs should lie where they fell, and noted that the plaintiff had accepted that Category 2 was the appropriate category, and confirmed the proceeding was Category 2.14
[21] The defendant says that the parties thereafter proceeded to trial and conducted the trial on the basis that the proceeding was Category 2.
[22] The defendant submits that the plaintiff has not made out the existence of special reasons that would justify the post-trial recategorization of the proceeding. Mr McBride for the defendant refers to two cases: Tindall v Far North District Council; and Body Corporate No 189855 v North Shore City Council15 in support of the proposition that an application made following the delivery of judgment contending that the skill classification initially determined for the proceeding is not adequate, and is unlikely to amount to a special reason justifying reclassification of a proceeding. The defendant says that the plaintiff’s submissions do not address the
13 J v J [2013] NZHC 1822 at [11].
14 Minute of Associate Judge Bell, 8 August 2018 at [3].
15 Tindall v Far North District Council HC Auckland CIV-2003-488-135, 25 May 2007; Body Corporate No 189855 v North Shore City Council HC Auckland CIV-2005-404-5561, 2 October 2008.
issue of why the plaintiff did not make a pre-trial application to address an uplift in the costs categorization.
[23] The defendant further says that reclassification is unwarranted in any event. He submits that the trial took two weeks and concerned a standard High Court claim in which the plaintiff was seeking damages of approximately $1.1 million, and Category 2 was always the appropriate classification.
Discussion and decision as to reclassifying the proceeding as Category 3
[24] The court may at any time determine a proceeding’s appropriate Category under r 14.3 in advance of trial unless there are special reasons to the contrary. What circumstances may amount to special reasons justifying a post-judgment reclassification of a proceeding’s costs Category was considered in Body Corporate No 189855 v North Shore City Council.16 In that case, although the factors identified by the successful plaintiffs were reasons which supported the proceedings being classified as Category 3 in the case of an assessment made before trial, they did not amount to special reasons for reclassifying the proceeding after trial. Venning J said:17
They are all reasons that would, or should have been apparent to the plaintiffs well in advance of trial. That was the time to make an application to vary the cost categorisation. As Winkelmann J noted in the Tindall decision the fact that the skill classification is not adequate is unlikely to be itself a special reason after trial. Any such application should at least address the issue of why it was not sought to address an uplift in the costs categorisation prior to trial. The plaintiffs have not done so.
For their own reasons all parties to this proceeding went to trial in the knowledge that the proceeding had been classed as Category 2. Decisions as to the conduct of the proceedings, including any pre-trial settlement discussions, would have been influenced at least in part by that classification. An important principle of the costs rules is that so far as possible the determination of costs should be predictable and expeditious. The principle of predictability would be undermined if the need for special reasons was read down and, following trial, it was effectively open for a successful party to seek to uplift the costs categorisation on the basis the earlier categorisation was incorrect.
16 Body Corporate No 189855 v North Shore City Council HC Auckland, CIV 2005-404-005561, 2 October 2008.
17 At [9] – [10].
[25] The plaintiff has not advanced any justification for not having raised the issue of the appropriate classification prior to trial. I respectfully agree with the observations of Venning J in Body Corporate No.189855, that the need for special reasons should not be read down so as to enable a successful party to seek an uplift of the costs categorisation following trial. The parties had both proceeded to trial on the understanding that the proceeding was Category 2, and their respective assessments and decisions regarding their conduct of the litigation were undertaken on that basis. In its memorandum filed with the Court in August 2018, the plaintiff had confirmed its view that Category 2 was the appropriate classification, and having done so it thereafter took no steps to request the Court to reconsider the matter.
[26] It is clear that the matters relied on by the plaintiff as supporting reclassification of the proceeding as Category 3 were evident to the parties prior to the trial. The complexities caused by the parallel 1926 proceedings, and arbitration proceeding and the related discovery issues were all matters that had arisen well before trial. While they are matters that provide reasons to support the proposition that the appropriate classification of the proceeding should be Category 3, they do not in my view amount to special reasons for reclassifying the proceeding after trial and after judgment has been delivered.
[27] The present case can be distinguished from that of J v J where the original categorisation was Category 2, however, during the trial preparation phase it had become obvious that complex factual and legal issues had arisen. These included limitation and psychiatric issues on which the parties were in sharp conflict and which gave rise to extensive evidence and complex argument, leading Chisholm J to observe that irrespective of whether these issues had been anticipated by the parties, continuation of the 2B categorisation would be “grossly unfair” to the plaintiff.18 Here the matters on which the plaintiff relies were apparent to the parties over a considerable period prior to trial, and there was therefore the opportunity for either party to seek to have the proceeding reclassified had they considered that it was appropriate to do so. In these circumstances, I do not consider the present case to be one where it would be “grossly unfair” for the Category 2 classification to continue to apply.
18 J v J [2013] NZHC 1822 at [11].
[28] I accordingly decline the plaintiff’s application for reclassification of the proceeding as Category 3 from 26 July 2018.
Claim for increased costs for the whole proceeding
[29] The plaintiff also seeks an award of increased costs by an uplift of 50 per cent from scale applicable to all steps in the proceeding.
The plaintiff’s submissions
[30] The plaintiff says that the defendant has been found to have breached his director’s duties, and to have pursued a strategy to obstruct and frustrate the plaintiff’s legitimate claims as a creditor of Vaco. The plaintiff says that but for the defendant’s breach of duties and his subsequent conduct by which he sought to obstruct and frustrate the plaintiff’s attempts to establish its claim, the whole proceeding would have been unnecessary.
[31] The plaintiff submits that the Court has found that the defendant adopted a strategy of obstructing and frustrating the plaintiff from pursuing its claim throughout the course of the events prior to it commencing this proceeding and during the course of the proceeding, including by his evidence at trial and aspects of his conduct of the trial.
[32] The plaintiff refers to the Court’s findings rejecting the defendant’s evidence and rejecting his explanations and justifications for failing to treat the plaintiff as being a creditor of Vaco. The plaintiff further notes that the Court also rejected the defendant’s claims that the contract engineer had undertaken an independent assessment of the plaintiff’s progress payment claims, and that he could not have regarded the Payment Schedules and certificates which concluded that the plaintiff was not entitled to any payment as conclusive as regards the real merit of the plaintiff’s claims. The plaintiff also notes the Court’s finding that in early April 2013 the defendant began distributing the net proceeds of sale of Lincoln Road to his associated interests, disregarding the plaintiff’s interests as a contingent creditor who was still pursuing its claim to moneys payable to it under the construction contract. The plaintiff says that the defendant’s action of placing Vaco into liquidation was yet another means
employed in an attempt to obstruct and frustrate the plaintiff’s claim, and that when making or procuring the distributions from the proceeds of sale to his associated interests, “he was not acting bona fide and in good faith, as he was not having sufficient regard to the interests of [the plaintiff] as an unpaid creditor of Vaco.”19
[33] The plaintiff says that there are a number of further examples of the defendant’s conduct which were designed to thwart and frustrate the expeditious resolution of the plaintiff’s claim and which caused increased cost to the plaintiff, including:
(a)By incorrectly asserting his good faith belief that the plaintiff was not a valid creditor of Vaco when procuring and arranging the distribution of the company’s funds. The plaintiff says that this assertion contained in the defendant’s pleadings and evidence not only led to the proceedings being necessary, but also increased the scope of discovery, the length of and scope of the evidence and cross-examination, the duration of the trial and the scope of counsel’s closing submissions.
(b)By failing to accept that the adjudication determination was binding on Vaco and himself. The plaintiff says that by adopting that position the defendant caused the plaintiff to address the merits of the matters on which the adjudicator had made findings, by its pleadings, discovery and evidence including briefing and calling expert evidence. The plaintiff says that addressing the issues significantly increased the cost, complexity and length and scope of the evidence, the hearing, and the parties’ submissions. The plaintiff submits that had the defendant not disputed that he and Vaco were bound by the adjudicator’s determination, it would not have been necessary for the plaintiff to call evidence from two expert witnesses, and would have significantly reduced the length and scope of its principal witness, Mr McClatchy.
(c)By failing to disclose in either his summary judgment affidavit or his initial affidavit of documents that payments of approximately $700,000
19 DHC Assets Ltd v Arnerich [2019] NZHC 1695 at [345].
had been made out of Vaco after April 2013, the defendant caused the plaintiff to incur the cost of repleading its case and taking account of those payments in the conduct of its case. The plaintiff submits that this was a significant element and an illustration of the defendant’s obstruction of the plaintiff, which caused additional costs being incurred.
(d)By serving a lengthy 27 page notice of objections to the admissibility of evidence of the plaintiff’s witnesses, requiring the preparation of an extensive 53 page reply memorandum, and not maintaining the challenges during the trial.
(e)By nominating and requiring the inclusion of 3,068 documents in the trial bundle thereby causing the preparation of a substantial trial bundle comprising 12,989 pages and contained in 22 printed and bound volumes. The plaintiff says that despite the defendant requiring this large number of documents, he only referred to 695 documents in the course of his evidence and cross-examination of witnesses. The plaintiff submits that whether intentional or not, the inclusion of this large number of documents in the trial bundle was completely unnecessary, and dealing with the large volume had the effect of disrupting the plaintiff’s trial preparation.
The plaintiff’s settlement offer
[34] The plaintiff further submits that the defendant’s refusal to accept its pre-trial settlement proposal set out in a letter sent to the defendant’s solicitors and counsel on 5 October 2017, should also be recognised by way of an uplift of scale costs. The plaintiff notes that the letter which was endorsed, “Without Prejudice Save as to Costs” advised that the plaintiff would accept the sum of $450,000 ( plus GST if any ), in full settlement of its claims against the defendant personally, Vaco, and the liquidator of the company arising from the construction contract, if paid within 30 days.
[35] The plaintiff says that as the Court has found the defendant liable to pay the plaintiff the sum of $367,768.12 with interest at 12.4 per cent compounding monthly,
and together with costs, the defendant would have been in a considerably better position by accepting the settlement proposal and effecting payment within the 30 days stipulated in the offer than he is following the trial and delivery of the Court’s judgment. In a schedule annexed to its costs memorandum, the plaintiff has set out a calculation of the total amount payable at monthly intervals between the date of the Adjudicator’s Determination (5 October 2016), and the end of February 2020. Pursuant to the plaintiff’s schedule, the calculated amount that was payable 30 days following the plaintiff’s 5 October 2017 settlement offer is $424,000. The plaintiff’s costs calculated on a Category 2 basis at that date were approximately $35,000 together with disbursements. The sum calculated as payable as at 30 September 2019 is $531,762 to which costs are to be added.
[36] The plaintiff submits that the correct comparative assessment of its October 2017 settlement offer is to be made with the amount that the defendant has been found liable to pay the plaintiff pursuant to the Court’s judgment including interest, and costs. On that basis the plaintiff says that it is clear that it would have been distinctly advantageous to the defendant to have settled with the plaintiff on the terms proposed in October 2017, and that comparison illustrates that his declining the settlement was unreasonable.
[37] However, the plaintiff in the alternative submits that the total exposure the defendant had to the plaintiff as at 3 November 2017 (being 30 days after the date of the settlement offer) in terms of the Court’s subsequent finding as regards his personal liability, was also more than the amount that the plaintiff had offered to settle for. The total outstanding including interest at that date, being $424,000 together with Category 2 costs of $35,000 and disbursements, exceeded the $450,000 sum proposed as settlement.
[38] The plaintiff relies on the provisions of rr 14.6(3)(b)(v); 14.10 and 14.11; and specifically 14.11(4). The plaintiff submits that the offer it made and the defendant’s rejection of the offer without reasonable justification should be taken into account by the Court in fixing costs. The plaintiff accordingly seeks an uplift of 50 per cent on scale costs claimed on the grounds of the defendant’s refusal of the settlement offer, or alternatively on the combined grounds of the refusal to accept the settlement offer
coupled with the defendant’s conduct of the proceeding that resulted in the plaintiff being required to expend increased time and cost in prosecuting its claim against him.
The defendant’s submissions
[39] The defendant opposes the plaintiff being awarded any uplift from scale costs. He says that none of the unsuccessful defences he advanced in response to the plaintiff’s claim justify an uplift being made to the costs. He submits that the plaintiff’s claims against him were defended on the basis that they were without merit and that the distributions made by Vaco were made on a bona fide basis. He says that as at the trial, none of the plaintiff’s claims had yet been progressed and finally determined by an arbitrator. Moreover he submits that although his defences were rejected by the Court, none of them were so unreasonable or hopeless as to warrant any adjustments being made to the plaintiff’s costs.
[40] Mr McBride submits that the two cases relied on by the plaintiff in support of its claim for increased costs are distinguishable. He submits that the circumstances in Mako Holdings were quite unlike those of the present case. He notes that the defendant director had a gross conflict of interest and had taken steps to ensure that two creditors of the company did not receive any payment for services they had rendered to the company at a time prior to the defendant acquiring the company and becoming its director. Counsel notes that the Court had described the defendant director’s defence as “hopeless” and as “an attempt to defend the indefensible which was finally rightly abandoned.”20
[41] The defendant says that unlike the circumstances in Mako Holdings, his defence was based on his assessment that the plaintiff’s claims were without merit and that he was therefore entitled to disregard the plaintiff as having creditor status. Mr McBride submits that although the defendant’s reasons for proceeding on the basis that he was not required to treat the plaintiff as a creditor of Vaco were rejected by the Court, such rejection is a normal occurrence in litigation such as the present, where
20 Mako Holdings Ltd (in liq) v Crimp HC Invercargill CP 23/99, 28 November 2000 at [76].
there will always be a winner and loser. Counsel relies on the observations of Asher J in InterCity Group (NZ) Ltd v Nakedbus NZ Ltd in which he said:21
…being proven wrong on a denied fact does not without more warrant an increase. If that were so there would be an increase against unsuccessful parties for most actual adverse findings. The fact that the defendant has failed is reflected in the overall costs award. There was nothing unusual or exceptional arising in this case warranting an increase in costs.
[42] The defendant accordingly submits that the fact that his defences were rejected at trial does not engage the increased costs provisions of the Rules, and their rejection is a normal incidence of litigation.
[43] In response to the plaintiff’s submissions relating to its settlement proposal in October 2017, the defendant says that the amount that he has been found liable to pay pursuant to the Court’s judgment of $367,768.12, is well below the amount of the plaintiff’s settlement offer, and even below the sum calculated as including the compound interest of $424,000.
[44] Mr McBride submits that the appropriate approach requires consideration of the reasonableness of the offer at the time it was made, and he submits that the plaintiff’s approach whereby the proposed settlement is compared to the sum for which the defendant was found liable by the court is wrong. Counsel submits that the defendant’s decision to refuse to pay more than the adjudication award in October 2017 was perfectly reasonable.
The defendant’s claim for a reduction of costs for the plaintiff’s failure to establish a significant part of its claim
[45] The defendant also notes that where a successful party has failed in relation to a cause of action or issue which significantly increased the costs of the other party, the Court may reduce the successful party’s costs.22 The defendant submits that while it is unusual for the Court to reduce costs because the successful party has not succeeded in every cause of action comprised in its claim, where an otherwise successful party
21 InterCity Group (NZ) Ltd v Nakedbus NZ Ltd [2014] NZHC 1299 at [18].
22 High Court Rules 2016, r 14.7
has failed in relation to at least half of its claim, the Court may reduce costs by the order of 25 per cent.
[46] The defendant says that two months before trial the plaintiff abandoned its first cause of action founded on an allegation that the Lincoln Road property had been purchased by Vaco at overvalue. The defendant submits that the plaintiff abandoned that claim after independent valuation documentation was discovered to the plaintiff by the defendant and which justified Vaco’s purchase price, leading the plaintiff to realise that its cause of action was hopeless.
[47] Furthermore the defendant notes that the plaintiff’s claims for time-related costs, additional contract variations, and preliminary and general costs relating to the variation required by the ASB Bank, which comprised approximately two-thirds of the amount claimed by the plaintiff, were rejected by the Court as being heads of claim that were required by the terms of the construction contract to be established by arbitration before they could be included in an amount of damages sought from the defendant. The defendant says that significant time and effort was expended by both parties at trial. The defendant submits that the plaintiff having failed to succeed to prove two-thirds of the total sum claimed in relation to discretely pleaded issues, the Court should reduce the scale costs by 25 per cent.
[48] Mr McBride notes that in August 2016 the defendant’s solicitors proposed to the adjudicator and all parties involved, that the adjudication process should cease and the dispute be resolved by arbitration to determine the amount owed to the plaintiff under the construction contract. However the defendant says that rather than taking up that course, the plaintiff effectively abandoned the arbitration already underway and proceeded first with the adjudication and then commenced this proceeding in the High Court in which it failed to establish two-thirds of the amount it claimed. The defendant submits that as a result of the plaintiff’s conduct of its claim, he was put through a trial involving a range of keenly contested construction contract claims, that he could never have been held personally liable for as the plaintiff was not a creditor of Vaco in respect of the amounts it was claiming.
[49] The defendant submits that those circumstances warrant a 25 per cent reduction of any costs awarded to the plaintiff.
The defendant’s settlement offer
[50] The defendant also made an offer of settlement, and says that the plaintiff’s refusal of the offer was unreasonable and is yet another factor that should be recognised and warrants a reduction of the plaintiff’s costs.
[51] The defendant’s offer of settlement was made in a letter sent by its solicitors to the plaintiff’s solicitors on 14 June 2017. The settlement offer was expressly made on a “without prejudice save as to costs” basis. The defendant offered to settle all the plaintiff’s claims arising from the construction contract including any personal liability he may have had, for $300,000 (including GST). The defendant says that the plaintiff’s decision to reject his settlement offer was unreasonable notwithstanding that the plaintiff was ultimately awarded damages for an amount $67,768 greater than the settlement sum he had offered. The defendant says that although the plaintiff was awarded a greater amount, that was over two years later and after the plaintiff had expended substantial irrecoverable legal costs in pursuing its claim.
[52] The defendant accordingly submits that given the ultimate outcome at trial, his June 2017 settlement was fair and should not have been rejected by the plaintiff. He says that the plaintiff’s declining the proposal to seek resolution of the dispute by arbitration and avoid the costs of an adjudication, together with its refusal to engage with the defendant’s offer of settlement shows that it adopted an unreasonable position as regards his attempts to resolve the dispute.
[53] The defendant submits that this is yet another matter supporting his contention that a 25 per cent reduction of the plaintiff’s costs is warranted.
Defendant’s submission as to proportionality of plaintiff’s costs
[54] Mr McBride further says that a core tenet of the Rules relating to costs is that the costs of a proceeding must be proportionate to the amount in dispute. He submits that it is relevant to note that the plaintiff decided not to proceed with the arbitration
proceeding it had commenced despite a hearing date having been allocated for it in December 2017. Counsel notes however, that the arbitration hearing was vacated and not rescheduled. Had the arbitration proceeded it would have determined the plaintiff’s construction contract claim, prior to its claim against the defendant being heard.
[55] Mr McBride submits that the plaintiff’s costs claim is disproportionate to the judgment sum. Counsel submits that the plaintiff’s decision to endeavour to prove complex quantum issues at trial, two-thirds of which was rejected, is nevertheless relevant to the fixing of costs and justifies a reduction of costs otherwise appropriate.
Discussion and decision as to uplifts and reductions sought by the parties
[56] In my judgment I found that the defendant had no proper foundation for believing that the plaintiff was not required to be treated as a creditor of the company, or for his claim that he believed that the plaintiff’s claims had been properly assessed and determined by the contract engineer as being without merit, and that it had no entitlement to any further money owing under the construction contract. I also found that the defendant took steps to arrange or procure the distribution of Vaco’s funds to his own associated interests knowing that the plaintiff was continuing to pursue its claims, and when the plaintiff subsequently advised him that it intended to refer its claims for adjudication, he endeavoured to obstruct or frustrate it by placing Vaco into voluntary liquidation.
[57] That approach also characterised aspects of the defendant’s subsequent conduct of these proceedings. I accept the plaintiff’s submission that the positions adopted and the tactics employed by the defendant resulted in the plaintiff and its legal representatives spending additional time than would otherwise have been required on issues of pleading, discovery, and trial preparation. During the trial considerable time was occupied by evidence and submissions directed at the issues relating to the defendant’s knowledge of the status of the plaintiff’s construction contract claims and whether they were being properly and independently assessed by the contract engineer, and his knowledge of the unresolved nature of plaintiff’s claims prior to and during the period when he arranged for Vaco’s funds to be distributed to his associated interests. Considerable time was spent by the defendant seeking to justify his actions
and explain the reasons for believing that the plaintiff’s claims against Vaco were without merit, and similarly considerable time was spent by the plaintiff successfully establishing that the defendant’s explanations and justifications lacked credibility and cogency.
[58] The judgment set out a conclusion summary of the Court’s findings on those matters:23
For all of the above reasons, I find that at the time Mr Arnerich made the distributions from the proceeds of sale to interests associated with himself, he was not acting bona fide and in good faith, as he was not having sufficient regard to the interests of CCL as an unpaid creditor of Vaco. His actions were conducted with disregard to CCL’s assertions as to its entitlements under the contract, with knowledge that the Engineer’s findings regarding those entitlements were not the product of independent judgment, and with knowledge that CCL had access to the dispute resolution procedures available under the contract to further advance its claim.
[59] I also accept the plaintiff’s submission that other aspects of the defendant’s conduct of the proceeding also contributed to the length of the hearing and to the requirement that the plaintiff incur additional legal costs over and above what would otherwise have been usually required for a case of this nature. Despite having taken part in the adjudication and making submissions to the adjudicator, at trial the defendant adopted the position that he was not bound by the adjudicator’s determination as regards the sum found owing to the plaintiff under the contract. I agree with the plaintiff’s submission that had the defendant accepted the adjudicator’s determination, it would have eliminated the need for the plaintiff to present evidence from the two expert witnesses, Messrs Brikic and Bryant, on the issue of the validity of the four contract time extensions claimed by the plaintiff and granted by the adjudicator. Such acceptance would also have resulted in Mr McClatchy’s evidence being considerably reduced in scope and length.
[60] Another contributing factor was the substantial volume of documents that the defendant required included in the trial bundle which comprised over 20 printed and bound volumes containing almost 13,000 pages. Despite requiring a large number of documents included in the trial bundle, the defendant made reference to fewer than a
23 DHC Assets Ltd v Arnerich [2019] NZHC 1695 at [346].
quarter of them in the course of the trial. I accept the plaintiff’s submission that irrespective of whether it was intended or not, the defendant’s requirement for the inclusion of such a substantial number of documents, necessarily required the plaintiff to devote considerable trial preparation time over and above what would be usual reviewing and considering the defendant’s documents as regards their relevance to the case.
[61] I consider that the plaintiff has shown that the defendant contributed unnecessarily to the time and legal expenses incurred by the plaintiff, by advancing arguments relating to his knowledge and belief as regards the plaintiff’s contract claims and how they were being assessed, and as regards his knowledge of the plaintiff’s status as a creditor of Vaco at the time when he arranged for the distribution of the company’s funds to his associated interests. The defendant’s requirements as regards the contents of the trial bundle were another contributing factor.
[62] I also find that the defendant’s rejection of the plaintiff’s settlement offer of 5 October 2017 was without reasonable justification. An assessment of whether the defendant’s failure to accept the settlement offer was without reasonable justification is appropriately focussed on the circumstances at the time the offer was made and the considerations applicable at that time which inform the issue of whether rejection of the offer was reasonably justified.
[63] The adjudicator’s determination was delivered on 12 October 2016 and had found that the plaintiff was entitled to payment from Vaco of $300,763.12 together with interest at a daily rate.24 On 15 March 2017 the High Court made orders granting the plaintiff leave to commence arbitration proceedings against Vaco (In Liquidation), and to apply to the District Court for the adjudicator’s determination to be enforced by entry of judgment against the company.25 By the end of October 2017 the total sum payable to the plaintiff pursuant to the adjudicator’s determination, including accrued interest, was $424,000. The plaintiff’s costs to that date if calculated pursuant to Category 2 were approximately $35,000 together with disbursements.
24 DHC Assets Ltd v Arnerich [2019] NZHC 1695 at [209] – [213].
25 DHC Assets Ltd v Vaco Investments (Lincoln Road) Ltd (in liq) [2017] NZHC 454.
[64] I consider that the settlement offer was reasonable and the amount of $450,000 was calculated in accordance with a realistic assessment of the respective merits of the parties’ positions at the time and represented a compromise between the parties’ earlier respective settlement proposals. The amount of $450,000 was close to but less than the amount to which the plaintiff had been found entitled by the adjudication determination once legal costs and disbursements were added. In my view, a settlement for that sum would have represented a realistic and sensible compromise and resolution of the dispute, but which required the defendant to accept that he was personally liable for the amount. Had the offer been accepted in October 2017 the plaintiff would have avoided incurring the significant legal costs and the application of considerable time and resources required to pursue its claim at trial.
[65] I find that the defendant’s failure to accept the plaintiff’s October 2017 settlement offer is a further aspect of the defendant’s conduct of the proceeding that justifies awarding the plaintiff an uplift of costs.
[66] I accordingly allow the plaintiff’s application for an uplift of scale costs by 50 per cent.
The defendant’s submissions regarding reduction of costs
[67] Although the plaintiff was unsuccessful in relation to two-thirds of the amount claimed, I do not consider this to be an appropriate case for reducing the plaintiff’s costs. The plaintiff has been successful in obtaining judgment for a sum well in excess of $500,000 including interest, and overall I consider that the plaintiff has achieved substantial success. Furthermore while the plaintiff did not succeed in its claims for amounts which the Court found had to be established pursuant to the arbitration provisions of the construction contract, the plaintiff’s decision to pursue those claims in this proceeding was no doubt influenced by previous rulings of the Court which encouraged it to adopt that approach.
[68] I also reject the defendant’s submission that a reduction on account of the plaintiff’s rejection of the defendant’s settlement offer of 14 June 2017 is appropriate. The plaintiff’s rejection of the settlement offer of $300,000 was not at all unreasonable having regard to the merit of its claims and the amounts of those claims.
[69] I accordingly decline to reduce the plaintiff’s costs on account of the measure of the plaintiff’s refusal of the defendant’s settlement offer.
[70] The plaintiff was unsuccessful in its application for summary judgment. I disallow its claim for costs in respect of those steps relating to the summary judgment application.
[71] Finally, I do not consider that this is a case which requires any reduction or adjustment to be made to the plaintiff’s costs on account of proportionality considerations. The quantum of costs determined in accordance with my findings as regards Category 2 and uplifted by 50 per cent are not disproportionately excessive having regard to the nature of the case and how the parties respectively conducted the litigation.
Disbursements
[72] The disbursements claimed by the plaintiff and detailed in the schedule accompanying its submissions total $150,557.96. The defendant opposes the plaintiff’s claim as regards several items.
The scheduling fees
[73] The defendant says that the plaintiff is not entitled to recover the scheduling court fees it paid in relation to three hearing fees, two of which relate to the plaintiff’s unsuccessful summary judgment application. As I have disallowed the plaintiff’s claim for costs in relation to steps taken in relation to the summary judgment application, I similarly disallow the plaintiff’s claim for these three scheduling fees.
Expert witness fee accounts
[74] The plaintiff seeks to recover the costs of engaging two expert witnesses, Mr Bryant and Mr Johnson. The costs relating to Mr Bryant billed by Octa Project Management total $28,000, and the costs relating to Mr Johnson billed by Quantum QS Ltd, are total $41,181.53.
[75] Mr Bryant’s evidence addressed the issue of whether the plaintiff was entitled to the extensions of time it had claimed under the construction contract. Mr Johnson’s evidence was directed at the issue of whether the plaintiff was entitled to additional preliminary and general costs under the construction contract.
[76] The defendant submits that neither of these disbursement claims should be allowed. The defendant notes that in its judgment the Court rejected that part of the plaintiff’s claim which related to claims for extensions of time and consequential delay costs as being matters that were required to be determined by means of the arbitration provisions of the construction contract. The defendant also notes that the invoices issued by Octa Project Management in respect of Mr Bryant’s work and attendances, do not contain details of the work undertaken other than noting the hours he spent and the applicable hourly rate. In the case of the Quantum QS Ltd invoices for Mr Johnson’s work and attendances, only a broad narration of his work is provided. The defendant submits that without a detailed description of the work undertaken, it is not possible for the Court to make an informed assessment of the reasonableness of the fees charged.
[77] While the defendant is correct that the Court rejected those parts of the plaintiff’s claim to which the evidence of these witness was directed, the plaintiff’s decision to engage these two experts and call them as witnesses at the trial was not unreasonable having regard to the history of the proceeding, and the plaintiff’s theory of the case whereby it sought to establish that it was a creditor of Vaco for losses in addition to those it established by means of the adjudicator’s determination. While the heads of the plaintiff’s claim to which the evidence of the witnesses was directed did not succeed, the evidence was relevant in a broader and general way to justify the approach taken by the plaintiff as regards the steps it had taken during the course of the construction contract and which informed an assessment of the appropriateness of its position on the range of disputed issues that arose during the course of the construction contract, as compared to that of the defendant.
[78] While I disagree with the defendant’s submission that these disbursements should be disallowed entirely, I nevertheless consider that having regard to the plaintiff’s lack of success on those parts of its claim to which these witnesses’ evidence
was directed, it is appropriate to apply a reduction to the amounts claimed, and I reduce the amounts of both these claimed disbursements by 50 per cent.
Yallop & Co
[79] The plaintiff seeks to recover the whole of the costs incurred by its engagement of Yallop & Co to assist with the preparation of the common bundle. The total amount sought by the plaintiff is $33,993.05 plus GST. That sum is made up as follows:
(a)Discovery, $6,757.50.
(b)Preparation of the common bundle, $4,822.50.
(c)Attendance at trial to operate the electronic courtroom, and hyperlinking documents contained in the bundle, $13,339.40.
(d)Yallop & Co disbursements for printing (41,684 pages); colour printing (1209 pages) and miscellaneous other printing and binding costs
$4,075.09.
(e)Yallop & Co disbursement for engagement of Streamline Litigation Support SLS for processing of discovery and inspection set costs,
$4,998.56.
[80] The defendant submits that the plaintiff’s claim for these disbursements arising from its engagement of Yallop & Co ought not be allowed. The defendant submits that it is not appropriate for outsourcing of electronic discovery and bundle preparation to be included as a disbursement where costs for those steps have also been claimed and included in the plaintiff’s calculation of its costs under the Rules. As regards the preparation of the common bundle, the defendant submits that if fees for outsourced preparation of the bundle are allowed as a disbursement, the plaintiff will recover 100 per cent of their costs for this step, rather than the approximately two-thirds of reasonable costs contemplated by the Rules.
[81] As regards the costs related to Yallop & Co’s attendance at the trial to assist the plaintiff’s counsel with operating the electronic courtroom set up by the plaintiff, the defendant notes that the plaintiff was represented by two counsel at trial and has sought certification for second counsel in its costs claim. The defendant submits that allowing the cost of Yallop & Co’s attendance at the trial as well as the claim for costs for second counsel, would result in the plaintiff recovering a greater amount than is contemplated by the Rules. The defendant says that the plaintiff’s counsel can be expected to have been able to operate the electronic trial bundle, as that process was undertaken for the defendant by his counsel.
[82] The extraordinarily large number of documents included in the trial bundle warranted the plaintiff taking steps to engage professional assistance for the preparation of the trial bundle in both electronic and hard copy formats, and to set up an electronic courtroom to facilitate speedy reference to the documents comprised in the bundle during the trial. The hyperlinking of the documents so that they could be instantly accessed during the course of evidence and submissions, was of considerable assistance to the Court and the parties by saving time. The functions undertaken by Yallop & Co in assembling, indexing, and composing the trial bundle documents in both hard copy and electronic formats, were in this instance discrete from the functions of the plaintiff’s counsel in relation to discovery. The mere volume of the documentation required to be assembled, indexed and included in the trial bundle clearly justified the outsourcing of this specialised work to Yallop & Co.
[83] Furthermore in my view, it was appropriate and reasonable for the plaintiff to engage Yallop & Co to assist its counsel to operate the electronic bundle in the electronic courtroom environment that had been established for the trial. I do not consider that this cost is something that is otherwise covered by the scale costs allowed for the plaintiff’s second counsel, and I find that costs charged by Yallop & Co and claimed by the plaintiff are reasonable.
[84]I accordingly allow the full amount claimed by the plaintiff as a disbursement.
Result
[85] Subject to the matters set out hereunder, the plaintiff is awarded costs on all steps set out in the schedule accompanying its costs memorandum to be calculated in accordance scale 2B with an uplift of 50 per cent. I certify for costs for second counsel.
[86] The plaintiff’s claimed costs for steps in connection with its unsuccessful summary judgment application are disallowed. However I make no order in favour of the defendant in relation to his successful opposition to the summary judgment application. The success achieved by the defendant in relation to the summary judgment and his entitlement to costs as the successful party is reflected in the overall outcome of this costs order.
[87] The plaintiff’s disbursements as set out and detailed in Part 2 of its schedule filed with its costs application are approved, other than the disallowed scheduling fees referred to in paragraph [73], and the expert witness fees which are reduced by 50 per cent as provided by paragraph [78].
Paul Davison J
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