Dominion Finance Group Limited (in rec and in liq) v Sade Developments Limited HC Auckland CIV-2009-419-001556

[2011] NZHC 1272

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2009-419-001556

BETWEEN  DOMINION FINANCE GROUP LIMITED (IN RECEIVERSHIP AND LIQUIDATION)

Plaintiff

ANDSADE DEVELOPMENTS LIMITED First Defendant

ANDS A LE PROU & ANOR Second Defendants

ANDTOREADOR SECURITIES LIMITED Third Defendant

ANDSECURED LENDING LIMITED Fourth Defendant

Hearing:         26 May and 4 July 2011

Appearances: G M Illingworth QC and M J Morris for Glaister Ennor

K J Crossland for Plaintiff

Judgment:      6 October 2011

JUDGMENT OF WHATA J

This judgment was delivered by Justice Whata on

6 October 2011 at 4.30 p.m., pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date:

Solicitors:

Glaister Ennor, PO Box 63, Auckland 1140

Stace Hammond, PO Box 19 101, Hamilton

Copy to:

G M Illingworth QC, PO Box 7205, Wellesley Street, Auckland 1141

DOMINION FINANCE GROUP LIMITED (IN RECEIVERSHIP AND LIQUIDATION) V SADE DEVELOPMENTS LIMITED HC AK CIV-2009-419-001556 6 October 2011

[1]      The  receiver  for  Dominion  Finance  Group  Ltd  (in  receivership  and liquidation) (“DFG”), Mr Pardington, claims that counsel for Mr and Mrs Le Prou, Mr McKendrick, had no basis for making various allegations against him, including those of “equitable fraud”, “conscious misuse of mortgagee power”, “bad faith”, and “ulterior motive”.  Following discontinuance of his clients‟ proceeding, wasted costs are sought against Mr McKendrick on the basis that he breached his duty to the Court.

[2]      Mr McKendrick  contends  that  he  had  a  proper  basis  for  making  the allegations,  including  a  discernible pattern of  obstructive conduct  and  acrimony between the receiver and the Le Prous.  He says it was therefore available to him to argue that the decision to commence summary judgment proceedings was motivated by an improper purpose, including to “silence a critic”.

[3]      The resolution of this dispute requires examination of the nature and scope of the wasted costs jurisdiction and whether Mr McKendrick‟s conduct triggered that jurisdiction.

Facts

[4]      The background facts are relatively straightforward.

[5]      On 23 April 2007 Sade Developments Ltd (“Sade”) borrowed money from DFG.  It borrowed the money for a property development.  Mr and Mrs Le Prou were parties  to  the  loan  agreement  and  signed  guarantees.    Glaister  Ennor,  and  in particular Mr McKendrick, acted as solicitors for Sade.

[6]      On 2 July 2010 DFG applied for summary judgment against the Le Prous, suing on the guarantee.  Mr Levin, an insolvency specialist assisting the receivers, stated the following in his affidavit in support of the application:

3.6As matters transpired however, when the real estate agent instructed by the Receivers conducted the mortgagee sale by public auction in Taupo  on  Sunday  13 December  2009  the  first  named  second defendant, Mr Shane Le Prou, attended that public auction.   Just before the auctioneer started the auction Mr Le Prou publicly stated at the auction that the first defendant had sold the security to a third

party.  This was an unexpected development.  Due to the uncertainty this created the Receivers decided it would be prudent to cancel the auction and did so.  Aside from whether Mr Le Prou was accurate in his claim about the sale of the security this development was also viewed as being not conducive to obtaining a good sale price from those prospective buyers present and not so in the short term thereafter.  The current position is that the Receivers have deferred the disposal of the security under Dominion‟s mortgage on the basis of advice that the real estate security now needs to be remarketed and sold at a later date.

[7]      The  Le Prous  instructed  Glaister  Ennor  to  represent  them  to  oppose  the summary judgment application.

[8]      The notice of opposition, drafted by Mr McKendrick and filed on 9 August

2010, included the following contents:

8        The plaintiff‟s  application for leave is made in bad faith due to

animosity against the first named second defendant.

9The plaintiff‟s application is made for the ulterior motive of seeking leverage over the first named second defendant, in order to prevent his future involvement with the sale of the security property.

…

17In  the  alternative,  the  plaintiff  has  committed  equitable  fraud (conscious misuse of mortgage power) in failing to act in good faith and co-operate to ensure the timely completion of the development and settlement of the sales, to include without limitation, providing releases of mortgage to enable the settlement of any sale of a unit in the development …

[9]      The notice of opposition and Mr Le Prou‟s affidavit refers to various actions by the receiver in support of these allegations, including (from the notice of opposition):

18The plaintiff has failed to discharge its contractual duties and/or duty of care and/or equitable duties, by:

(a)       Failing to provide partial releases of mortgage by the date and in the manner requested in respect of agreements for sale and purchase dated 24 August 2009, between the first defendant  and Matoha  Developments  Limited  (“Matoha”) for the purchase of eighteen lots for $4.5m.

(b)       Failing to provide a partial release of mortgage by the date and in the manner requested in respect of an agreement for sale and purchase dated 10 March 2010, between the first

defendant and CSLP Holdings Limited for the purchase of lot 7 (the house lot) for $650,000.

(c)       Failing to provide a partial release of mortgage by the date and in the manner requested in respect of an agreement for sale and purchase entered into in early 2010, between the first defendant and Mr Mitchell for the purchase of lot 23 for

$190,000.

(d)       Failing to provide a partial release of mortgage by the date and in the manner requested in respect of an agreement for sale and purchase entered in late 2009, between the first defendant and Mr Andrew and Ms Spencer for the purchase of lot 20 for $165,100.

[10]     Paragraph  19(a)(iii)  of  the  notice  alleged  that  DFG  had  breached  “its obligation not to commit equitable fraud”, while paragraphs 22 and 23 repeated the same allegations made at paragraphs 8 and 9.

[11]     The following statements were also included in Mr Le Prou‟s affidavit of

4 August 2010, filed in support of the notice of opposition:

16The relationship which I have had with Mr Pardington, who is one of the receivers of the plaintiff, has been turbulent, to put it politely. This is a result of the frustration over not being able to get meetings with Mr Pardington, despite repeated requests, and his mishandling of the receivership file and failing to consent to partial discharges of DFG‟s  mortgage  to  allow  sales  to  settle  …    It  [the  summary judgment application] has been made in bad faith and for the ulterior motive of seeking to “silence a critic”.   He [Mr Pardington] also does not want his failure to agree to various agreements for sale and purchase  being  the  subject  of  an  examination  at  a  full  hearing. Given his various failures, that is understandable.

…

71The   Receivers   [sic]   deliberate   attempt   to   misrepresent   my involvement  in  the  auction on  13 December  2009  is  concerning. The Receivers [sic] stated view will have been a strong reason for him to bring an application for summary judgment, as a vendetta action,  as  opposed  to  a  genuine  belief  that  there  was  no  fairly arguable defence.  He wants me “silenced”.

[12]     In  his  reply  affidavit  of  3 September  2010,  Mr  Levin  provides  detailed evidence on the alleged failures.  Dealing with each of Mr Le Prou‟s complaints:

(a)       Failure to consent to Matoha transactions (para 18(a) of the notice of opposition).

Sade was seeking consent from DFG to discharge DFG‟s mortgage in respect of the lots being sold under this transaction.   However, that consent was being sought on the basis that DFG‟s debt would not be fully discharged as a consequence of the transaction.  Mr Levin also deposes that any delays were explicable by the simple fact that the receivers  were  managing  a  very  substantial  receivership.    In  any event, some of the delay was caused by the Le Prous including the

production of an erroneous settlement statement.1

(b)      Failure to grant partial release of mortgage for sale of lot 7 (para 18(b)

of the notice of opposition).

This sale was a sale to Mr Le Prou‟s  son, Cole Le Prou.   It was a related party sale.  The receivers wanted to get a better price than the

$650,000 on offer, namely $700,000.2

(c)       Failure to consent to release of mortgage for sale of lot 23 (para 18(c)

of the notice of opposition).

The receivers had a concern about a deposit of $40,000 that had been previously paid under an earlier agreement in relation to the same property.  As no explanation was forthcoming about that deposit, the receivers were not prepared to grant consent.

(d)      Failure to consent to release of mortgage for sale of lot 20 (para 18(d)

of the notice of opposition).

The receivers considered that sale of this lot, being one of the best sections, should be undertaken by a contestable process.  This is why

consent was declined.3

1 Reply affidavit of H Levin at [2.28].

[13]     Mr Le Prou  also  complained  that  the  receivers  were  negligent  in  the advertising campaign for lot 20.  However, Mr Levin points out that the auction had been approved by the High Court.4

[14]     Mr Levin admits that he made a partial error in saying that Mr Le Prou had said at the auction that he had sold the security to a third party.   However, the substantive concerns relating to Mr Le Prou‟s conduct were valid, and in particular, he says, Mr Le Prou had entered into sale and purchase agreements for two lots that

were subject to the injunctive relief granted by the High Court.5

[15]     Some time after the lodgment of evidence in response, the Le Prous consulted other lawyers.  On 5 November 2010 a joint memorandum of consent disposing of the  applications  was  lodged.    On  8 November  2010,  Potter J  made  orders  in accordance with a joint consent memorandum, which included judgment being entered against the Le Prous for an amount sought in the application.

The plaintiff ’s view

[16]   Mr Crossland, for DFG, submits that Mr Pardington is an experienced insolvency practitioner.  He is a principal of one of the leading accountancy firms in the world.  DFG‟s receivership required a significant amount of work.  Mr and Mrs Le Prou were just two of 83 debtors of DFG.

[17]     The central complaint is that Mr McKendrick allowed statements that call into question the integrity, good faith and honesty of Mr Pardington without any evidence to support such allegations.  In fact Mr Crossland says that Mr McKendrick was aware of information that directly contradicted the allegations, including the information detailed in Mr Levin‟s reply affidavit.

[18]     Mr Crossland notes that communications in the possession of Glaister Ennor showed cooperation on the part of the receivers.  He pointed to documents that he says   “are   completely   counterintuitive   to   what   Mr   Le   Prou   was   asking

Mr McKendrick  to  level  against  Mr Pardington”.    He says  it  is  startling that  a “lawyer with documentary evidence” explaining delay can still “proceed with allegations of the type that appeared”.

[19]     The plaintiff also highlights apparently duplicitous conduct on the part of the Le Prous.   It transpires that while DFG diligently worked on determining whether consent should be given to the Matoha purchase, Glaister Ennor had already advised the purchaser that the condition requiring receiver‟s consent was already satisfied. Mr Crossland then contends that material relating to these matters should have been put to the Court to provide the proper balance.  Failure to do so was misleading.

[20]     On  that  basis,  the  plaintiff  submits  that  the  allegations  made  under  the guidance  of  Mr McKendrick  were  not  only  false,  but  were  grossly  false  and inaccurate.

The view of Glaister Ennor

[21]     Mr Illingworth QC contends for the defendant that there remained a proper and tenable basis for the allegations made.   The allegations, and the notice of opposition, need to be seen within their proper context.  Firstly, the opposition was triggered by a serious and erroneous allegation, namely that Mr Le Prou had publicly said that he had sold the security to a third party at the auction.   Mr Illingworth notes:

Despite not having personally witnessed the events of which he was purporting to give testimony and despite his evidence being in breach of both  the  High  Court  Rules  and  the  Evidence Act  2006,  Mr Levin  was prepared to make a serious allegation against Mr Le Prou;

He contended (again in paragraph 3.6 of his affidavit) that “just before the auctioneer started the auction Mr Le Prou publicly stated at the auction that the first defendant had sold the security to a third party”.

The  clear  inference  was  that  Mr Le  Prou  had  deliberately  attempted  to scuttle the auction by publicly telling a lie to the prospective purchasers who were present at the auction.

[22]     The summary judgment proceedings were therefore viewed by the Le Prous as an aggressive and improper act, designed to “silence a critic”.  That perception

was compounded by the fact that the receivers were not initially going to issue such proceedings.6

[23]     Mr Illingworth then says that the Le Prous‟ anxiety should be set within the further context of the repeated failures on the part of the receivers to agree to partial releases of mortgages in respect of various of the lots and/or for sale.  There are then concerns about the poor marketing of the relevant properties for the purposes of auction.

[24]     The background is one of animosity exemplified, he says, in ex post facto descriptions of Mr Le Prou used by Mr Pardington in correspondence to a third party.  While this correspondence was not available to Mr McKendrick at the time the notice of opposition was prepared, Mr Illingworth says it gives the flavour of the

context that would have been understood by Mr McKendrick:7

That lot is one of two preferred by most who attended the auction that Le Prou successfully sabotaged by misrepresentation.   Where going to a contestable process again but, as you can imagine, there are a few things that we are going to address first.   We would prefer to sell the lots via the contestable process.  However, I will talk to our agents and revert.

Your client announced to prospective purchasers at the auction that he had bought the lot we were attempting to auction and a solicitor had advice that he owned it.   That presented us to all attending as cheats trying to sell a section twice.  Neither helpful or correct.  Le Prou has set the deal up after the second Court injunction in our favour days before the auction without notice to us and without knowledge that he could not sell and settle without our consent.

[25]     I  understand  Mr Illingworth  to  then  be  saying  that  apparently  innocuous conduct on the part of the receivers, including otherwise explicable delay, was infected by what appeared to be aggressive and unmeritorious allegations levelled at Mr Le Prou.  It is against this backdrop that the complaint of equitable fraud, among others, is made.

[26]     As to Mr Crossland concerns about the Matoha communications, he says that

Glaister Ennor simply waived the requirement to obtain the receiver‟s consent as a

6 Refer [3.5] - [3.6] of the Levin affidavit.

7 Exhibit R to the affidavit of Henry David Levin in reply.

condition of sale.  This is, he says, irrelevant to the underlying concern of delay and refusal to consent to various transactions.

The issues

[27]     There are subtle though important differences between the parties as to the proper threshold tests to be applied to the conduct of solicitors in this context.

[28]     The  plaintiff  submits  that  jurisdiction  to  award  wasted  costs  against  a solicitor arises on   a serious dereliction of the solicitor‟s duty to the Court.8    The content of that duty in this context is informed by both the common law and the rules from the Lawyers and Conveyances Act (Lawyers Conduct and Client Care) Rules

2008 (“the Rules”).   The plaintiff then submits that wasted costs may be ordered against counsel for breach of the following duties (among others):

(a)      A  solicitor  must  have  before  him  material  which  as  it  stands, establishes a prima facie case of fraud.9

(b)A lawyer engaged in litigation must not attack a person‟s reputation without good cause in Court or in documents filed in Court proceedings.10

(c)      A lawyer must not be a party to the filing of any document in Court alleging fraud, dishonesty, undue influence, duress, or other reprehensible conduct, unless the lawyer has taken appropriate steps to ensure that reasonable grounds for making the allegation exist.11

[29]     Glaister Ennor say that the wasted cost jurisdiction focuses solely on the conduct of counsel in proceedings before the Court and is concerned to avoid “gross

negligence [or] gross neglect or inaccuracy in a matter which it was a solicitor‟s duty

8 Harley v McDonald [2002] 1 NZLR 1 at [48].

9 Relying on X v Y [2000] 2 NZLR 748 at [58]-[61], relying on W Boulton, Conduct and Etiquette at the Bar (2nd ed, 1957) at 20. See also Boulton, at 26. Detailed at paragraph 3.1 of submissions.

10 The Rules, r 13.8.

11 Ibid, r 13.8.1.

to ascertain with accuracy”.12   It has nothing to do with breaches of other duties, for example under the Rules.

[30]     More  specifically,  the  defendant  says  that  the  jurisdiction  relates  to  the following duty:13

Their Lordships agree with the Court of Appeal‟s  conclusion in [1999] 3

NZLR 545 at para [59] that a duty rests on officers of the Court to achieve and maintain appropriate levels of competence and care and that, if he is in

serious dereliction of such duty, the officer is properly amenable to the cost

jurisdiction of the Court.   But care must be taken not to assume that just because it appears to the Court that the case was hopeless there was a failure by the barrister or solicitor to achieve the appropriate level of competence and care.

…

The essential point is that it is not errors of judgment that attract the exercise of the jurisdiction, but errors of a duty owed to the Court.

Nature and scope of the wasted costs jurisdiction

[31]     A wasted costs order is sourced in the inherent supervisory jurisdiction of a Court to punish an offending solicitor for failure to perform his or her duty to the Court.14    The jurisdiction is also compensatory, that is to compensate costs wasted

because of counsel‟s misconduct.15

[32]     At its core, the jurisdiction is directed to ensuring that a solicitor displays a basic level of competence in the handling of a case and does not abuse the Court‟s process.16   A solicitor must not mislead the Court.17   As the parties agree, there must

be a serious dereliction of duty akin to gross negligence or gross inaccuracy on a

12 Refer [2.7] of defendant‟s submissions dated 11 May 2010 and Harley supra at [55].

13 Harley supra at [57].

14 Harley supra at [49], Myers v Elman [1939] 4 All ER 484 (HL) at 508 and I H Jacob „The Inherent

Jurisdiction of the Court‟ (1970) CLP 23 at 47.

15 Harley supra at [49].

16 Harley at [45] and [57]; Myers v Elman at 508.

17 R v Huang [2009] NZCA 527 at [47]-[50]. These are overriding duties, sourced in the solicitors‟

oath, common law and professional standards (Huang, at [47], refers also to Rondel v Worsley [1969]

1 AC 191 at 227). There are various sanctions for their breach, including censure, (Huang, Westpac New Zealand Ltd v Fonua [2010] NZCA 471); disciplinary proceedings (Gazley v Wellington District Law Society [1976] 1 NZLR 452) and, wasted cost orders (Harley supra). They are not mutually exclusive (Refer Huang, Westpac, s 268 Lawyers and Conveyancing Act 2006).

matter that was within the solicitor‟s duty to ascertain.18    An allegation of serious breach must be capable of summary disposal.19   The facts relating to the impugned conduct must be easily verifiable.20   A hopeless case is not proof by itself of serious misconduct or incompetence.21     Finally, an erroneous assertion in pleadings with some evidential foundation is not the type of misconduct that attracts a wasted costs order.22

[33]     Specific examples of conduct attracting wasted costs orders against solicitors include:

(a)      Allegations  of  moral  turpitude  without  any  evidence  to  support them.23

(b)      Permitting  a  client  to  make  an  inadequate  or  false  (discovery)

affidavit.24

(c)      The statement of claim was incomprehensible and the causes of action were plainly unarguable and the proceedings were brought without an order for a litigation guardian.25

(d)The solicitor swore an affidavit in support of a petition asserting facts which any competent solicitor must have appreciated could not be established on the evidence available.26

(e)      Where a clerk, standing near the place where the jury assembled, discussed the case with the defendant and a re-trial was necessary.27

(f)       Where the lawyers failed to turn up to a hearing.28

18 Harley supra at [48] and [55]; Westpac supra at [32]-[33].

19 Westpac supra at 33.
20 Harley supra at 52.
21 Ibid, at [57], [66] and [67].

22 Huang at [66]; Westpac at[ 40]-[41], see also by analogy Metcalf v Mardell [2002] 3 All ER 721 (HL) at [22].

23 X v Y [2000] 2 NZLR 748 at [58].

24 Myers supra at 491, 511.
25 L v Chief Executive of the Ministry of Social Development (2008) 19 PRNZ 116.
26 In Re A Company [1996] 1 WLR 491.

27 In Re Sternberg Reed Taylor & Gill (A Firm) [1999] EWCA Crim 1870.

[34]     Wasted costs orders were not granted in cases where:

(a)      The practitioner was precluded from giving a full answer to the application because of legal professional privilege.29

(b)      Affidavit evidence clarified an otherwise misleading pleading.30

(c)      A mistake by a law clerk in a legal aid application.31

(d)There were a combination of alleged errors, including proceeding in a certain way based on a misunderstanding of law, failing to ascertain that there was an error in a crucial fact, erroneous assumption that a defendant had been served, and misuse of the statutory demand procedure  (in  a  context  where  there  were  time  pressures  and significant other difficulties for the solicitor in presenting the case).32

[35]     The practical constraints on jurisdiction were highlighted by Lord Bingham in this way:33

Save in the clearest case, applications against the lawyers acting for an opposing party are unlikely to be apt for summary determination, since any hearing to investigate the conduct of a complex action is itself likely to be expensive and time-consuming. The desirability of compensating litigating parties who have been put to unnecessary expense by the unjustified conduct of their opponents' lawyers is, without doubt, an important public interest, but it is, as the Court of Appeal pointed out in Ridehalgh's case [1994] 3 All ER 848 at 856, [1994] Ch 205 at 226, only one of the public interests which have to be considered.

[36]     Given  the  foregoing,  while  a  solicitor‟s  duties  under  the  Rules  provide standards by which to measure conduct, I do not consider that the wasted costs jurisdiction applies to all breaches of a solicitor‟s duty under those Rules or for that matter to the Court.  It applies only to a serious dereliction of duty in the conduct of

proceedings, usually in a way that is obvious to the Court that the conduct has

28 R v Rodney [1997] PNLR 489 (CA) and R v Secretary of State for the Home Department, ex p

Mahmood [1999] COD 119.

29 Medcalf v Mardell [2002] 3 All ER 721.
30 Westpac supra at [40].
31 R & T Thew Ltd v Reeves (No.2) [1982] 3 All ER 1086.
32 Ridehalgh v Horsefield [1994] 3 WLR 462.

33 Medcalf v Mardell supra at 734-735.

wasted the resources of the parties.  It is not applied in cases where the facts relating to the conduct are disputable or where there is a plausible basis in law and/or fact for the conduct.  Their Lordships in Harley34  were adamant that a hopeless case is not evidence of misconduct – as their Lordships accepted, a lawyer is there to advocate not to judge.

[37]     Unsurprisingly,  there  are  no  bright  line  thresholds  to  be  applied  in  this context.  However, given the themes set out in the authorities, I must be satisfied that the impugned conduct was obviously and grossly wrong, improper, negligent or misleading.

Does Mr McKendrick’s conduct attract a wasted costs order?

The conduct

[38]     The impugned conduct is described at paragraphs [6] – [11].  I will deal with linked allegations in turn and then examine the conduct as a whole to determine whether  Mr McKendrick‟s  duty  to  the  Court  has  been  obviously  and  grossly breached.

Bad faith/ulterior motive/silence a critic

[39]     The Le Prous alleged “bad faith”, “animosity” and a desire to “silence a critic”.  They form the basis for the opposition for leave to issue proceedings, and relate specifically to the conduct of the plaintiff in commencing the proceedings. They are allegations, in effect, of abuse of process. These allegations were erroneous and  very  weak.    But  the  alleged  bad  faith  was  directly  linked  to  Mr  Levin‟s erroneous statement and the evidence of acrimony between Mr Le Prou and the receivers.   This context provided a basis for then alleging a desire to “silence a critic”.   It was then for DFG to produce evidence to contradict those allegations, which it did through Mr Levin. There is obvious hyperbole in Mr Le Prou‟s affidavit

for example the reference to a vendetta action, and that should have been culled. But

34 Harley supra at [57], citing Sir Thomas Bingham MR (as he then was) in Ridehalgh v Horsefield

[1994] Ch 205 at 234.

the gravamen of the complaint involved disputable matters and I am satisfied that Mr McKendrick had a basis (if weak) to raise a concern on behalf of his client, as he was obliged to do.

[40]     I also consider that there is some irony in the receiver‟s complaint about this part of the pleading when Mr Levin made an erroneous allegation about Mr Le Prou. The allegation that Mr Le Prou had stated publically at an auction that the security had been sold was very serious. It cast Mr Le Prou in a very unfavourable light.  It did not have a proper foundation.  Mr Levin was not even at the auction so could not give direct evidence on it.  While it does not directly bear on the question of whether Mr McKendrick breached his duty to the Court, the allegation was wrong and invited trouble.

Equitable fraud (conscious misuse of mortgagee power)

[41]     Allegations as to equitable fraud and conscious misuse of mortgagee power require closer scrutiny to ensure that there is at least a plausible basis for each element of the fraud.  These terms have a technical meaning and it is incumbent on counsel to use them correctly.   They are raised in opposition to the summary judgment.  They  are  serious  allegations  to  make  about  a  receiver.     Indeed, Mr Crossland is highly critical of Mr McKendrick.   He says Mr McKendrick was alleging   that   Mr Pardington   had   acted   dishonestly   and   without   probity. Mr McKendrick avers, however, that he did not intend to use those concepts to mean or encompass a dishonest design to cheat Mr Le Prou for financial motives.

[42]     It must be said at the outset that the pleadings are awkwardly framed by referring to alleged equitable duties.  It is debatable whether receivers are bound in equity, rather than just statute, to observe the interests of mortgagors.35    But as the case for wasted costs was not driven by this starting point, the recourse to the law of

equity, by itself, would not in my view give rise to a wasted costs order.

35 See, e.g., McCreanor Estate Nominees Ltd v Trustees Executors & Agency Company of New Zealand HC Wellington CP150/99, 8 July 1999;  Elders Pastoral Ltd v BNZ [1989] 2 NZLR 180 (CA) at 192.

[43]     It is necessary nevertheless to carefully examine the relevant pleading to first determine whether Mr Crossland‟s complaint is justified and/or whether the pleading has a proper basis. The relevant pleading states:

17       In  the  alternative,  the  plaintiff  has  committed  equitable  fraud (conscious misuse of mortgage power) in failing to act in good faith and co- operate to ensure the timely completion of the development and settlement of the sales, to include without limitation, providing releases of mortgage to enable the settlement of any sale of a unit in the development …

[44]     Turning then to then use of the phrase “equitable fraud”.  Equitable fraud is defined  by  The  Laws  of  New  Zealand,  Equity,  as  follows  (footnotes  omitted, emphasis added):

132.     Introduction

In Chancery the term “fraud” came to be used to describe what fell short of deceit, but imported breach of a duty to which equity had attached its sanction. Sometimes the label of “equitable fraud” or “constructive fraud” has been attached to people who acted merely in ignorance of their duties or, to put it differently, in the mistaken belief that they were acting properly. When fraud is referred to in the wider sense in Chancery in describing cases within its exclusive jurisdiction, no actual intention to cheat needs to be proved. …

[45]     Equitable  or  constructive  fraud  therefore  does  not  require  proof  of  a subjective intent or design to cheat or dishonesty.  In fact, an allegation of equitable fraud in this context is simply that the receiver failed to ensure, in good faith, the timely  completion   of   the  development   and   settlement   of  sales.   It   is   then particularised in the notice of opposition by reference to the alleged failures to consent to various sales that might have avoided the summary judgment (referred to at paragraph [9] above).  There is at least some authority in this context that a failure to act in good faith can be shown if a receiver does not act reasonably to secure a

proper price with reckless disregard of a mortgagor‟s interests.36   That is significant,

because the allegation of equitable fraud therefore does not necessarily imply the type of dishonesty of most concern to Mr Pardington.

[46]     In  contrast, an unqualified assertion of “conscious misuse” of mortgagee powers  appears  to  elevate  the  alleged  impropriety  squarely  into  the  realm  of

36 Moritzson Properties Ltd v McLachlan (2001) 9 NZCLC 262, 448.

dishonesty for a financial motive.  That phrase is commonly linked to a subjective intent to dishonestly cheat a mortgagor.37

[47]     One can readily see why Mr Pardington has complained so vigorously at this combination of allegations.  There was no evidence pointing a subjective intent to cheat Mr Le Prou.  The bracketed allegation of conscious misuse of mortgage power is however, as I have said, immediately explained and particularised by the rather more mundane allegation of failing to complete the development and sales in a timely fashion.

[48]     In this regard I note that the Court of Appeal in Westpac New Zealand Ltd v Fonua38 relied on affidavit evidence to clarify an otherwise misleading pleading.  In that case the Court observed (footnotes omitted):

[36]      We consider that the respondent, knowing that Nga Uri as a statutory incorporation did not exist, could have protected himself by ascertaining precisely who were the persons involved in the unincorporated entity and then  taking  appropriate  steps  once  their  true  identities  and  details  were known. But as noted above, we were not informed what occurred once the respondent was aware of the “problem”.

…

[40]     We  consider  that  the  circumstances  of  this  case  required  the respondent as solicitor in the litigation to make known the nature of the argument to be advanced in opposition, so that the other party could react appropriately and also so that the Court was informed as to the nature of the argument and the status of the group he was representing. Had the matter rested solely on the notice of opposition, we consider the respondent would have been at serious risk of a costs order on Harley principles. But we are satisfied that the position is saved by the content of the two affidavits from Messrs Sadiq and Wright.

[41]     Once the appellant received those affidavits, it learned that Nga Uri was  viewing itself  as  a Maori body,  whose status,  if any,  derived from tikanga Maori. So far as New Zealand law was concerned, they were clearly no more than an unincorporated group of people. What Westpac also learned, however, was that two of the principals were:

(a)       Mr Sadiq, who asserted he was a member of Nga Uri, the manager of its construction arm, and authorised to make the affidavit on the group‟s behalf.

37 Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq) (1965) 113 CLR 265; [1966] ALR 775.

38 Westpac New Zealand Ltd v Fonua [2010] NZCA 471.

(b)       Mr Wright, who was chairman of Nga Uri, “a Maori tribal entity based in Katikati”. He too was authorised to make the affidavit.

…

[43]     Therefore viewing the conduct of the respondent and in the light of the facts summarised above, we consider that the conduct was far from satisfactory.  It  undoubtedly  involved  more  than  a  simple  mistake  or oversight. But on balance we cannot conclude that it reached the level of seriousness required to justify a costs order against the respondent. … In summary, we consider that the appellant has not established that the conduct of the respondent involved gross neglect or the type of incompetence necessary to warrant a personal costs order. The appellant has failed, by a narrow margin, to establish a serious breach of the respondent‟s duty to the Court.

[49]     By analogy,  the  reference  to  “conscious  misuse  of  mortgagee  power”  is clarified by its immediate context to imply something less than a dishonest motive. If it had appeared without that context, then like the Court of Appeal in Westpac, I would have had little option but to find a breach of the Harley principles. It would be a statement without a proper foundation. But the context clarifies what is meant by the pleading. Indeed, as I have explained above, if the evidence and notice are read together, the complaints are essentially about inordinate delay and failure to provide for Mr Le Prou‟s interests.  There is no overt suggestion of dishonesty for financial gain other than the inapt use of the technical descriptor “conscious misuse of mortgagee power”.

[50]     The plaintiff, however, says that Mr McKendrick must have known that the sales were refused on a proper basis and therefore should have refused to make the allegations.  I do not accept this.  He may have had knowledge of their explanations for their conduct.  He may have considered them to be reasonable explanations.  But it was not for Mr McKendrick to judge his client‟s concerns about the receiver‟s conduct.  He simply had to satisfy himself that there was a basis for raising concerns with the Court and that he was not misleading the Court.

[51]     As to Glaister Ennor‟s correspondence files holding information showing that the  allegations  were  spurious,  I  consider  that  there  is  an  important  difference between:

(a)       A scenario where an allegation is directly contradicted by verifiable facts known to counsel;  and

(b)A  scenario  where  an  inference  might  be  drawn  from  information available to counsel that the allegation is wrong.

[52]     Scenario (a) is amenable to the summary jurisdiction on the twin basis that the allegation is obviously flawed and failure to produce the information is misleading.  The “existence” or not of a document or a communication not disclosed might demonstrate misleading conduct on the part of counsel, as it did in Myers.39

Scenario (b) is not readily amenable to summary jurisdiction as it requires an inquiry into disputed facts and available inferences from information.  I consider this part of the case falls into the latter category. I will use the Matoha transaction to illustrate my point (notice of opposition, para 18 (a), above at [9]).

[53]     The Le Prous secured a sale of some of the Te Kowhai properties to Matoha in August 2008.   It was for $4.5 million, with $1.8 million owing to Westpac and

$3.8 million owing to DFG. In addition there were a further four developed lots, a house lot and four undeveloped lots still to be sold. Mr Le Prou says these would have covered the balance of any debt.  Glaister Ennor sent notice of the sale of DFG on 11 September.   It received Westpac‟s  consent on 16 September.  Discharges for the mortgages from DFG were not however received until 20 January 2009, five months later.  By February, Matoha could not “fathom why [the Le Prous] believe this agreement could be resuscitated”.

[54]     Mr  Le Prou  blames  the  receiver  for the  five  month  delay,  citing  several requests for urgency and lack of action.   He failed to refer to potentially relevant correspondence, including an e-mail in late October showing some co-operation and stating that the receiver was awaiting an agent‟s appraisal.  He also did not highlight the error made by Glaister Ennor that caused some delay.   But none of this incontrovertibly shows that the allegation of bad faith is manifestly wrong or that Mr McKendrick  was  misleading  the  Court  or  grossly  derelict.    An  available

inference   on   the   facts   is   that   the   delay   was   unreasonable.      In   addition,

39 Myers supra.

Mr McKendrick must have also known that the omitted material could and would likely be produced by the receivers.  So any possible misleading conduct was going to be short-lived and in the knowledge that the allegation would be hotly debated.

[55]     Accordingly,  in  my  view,  the  asserted  reasons  for  equitable  fraud  and conscious misuse of mortgage were essentially allegations of a failure to discharge alleged duties of a receiver to a mortgagor. They were not allegations of dishonesty. They were weakly based, but they had a basis.  To the extent that Mr McKendrick left out information adverse to his position, it was not such a gross omission as to trigger the wasted costs jurisdiction.

[56]     In  those  circumstances,  the  pleadings,  while  flawed  and  not  happily constructed, were not grossly inappropriate, misleading or negligent.

Overall view

[57]    Stepping back from the finer grain, were the allegations grossly wrong, inappropriate   or   negligent?      As   I   have   said,   Mr Pardington‟s   reaction   is understandable.    Mr Pardington  acted  honestly  and  with  appropriate  caution  in handling the assets under his management.  Glaistor Ennor plainly accept this.  But when the allegations are stripped away to their bare essentials they are allegations that the receiver seriously breached his duty to exercise his powers with reasonable

regard to Mr Le Prou‟s interests.40  They do not imply dishonesty when set in their

full context. Mr Levin‟s evidence also unhelpfully inflamed the sense of distrust.  It was not Mr McKendrick‟s role to deny Mr Le Prou access to the Court because the allegations were weakly based and may affect Mr Pardington‟s reputation.  Quite the reverse, it was his role to represent his client.  In this regard I am usefully reminded by Boulton:41

So also, when it comes to his speech, he must put every fair argument which appears to him to help his client towards winning his case.  The reason is because he is not the judge of the credibility of the witnesses or of the validity of the arguments.  He is only the advocate employed by the client to

40 Consider for example the receivers duties under ss 18 and 19 of the Receivership Act 1993.

41 W Boulton, A guide to conduct and etiquette at the bar of England and Wales (6th ed, Butterworths, London, 1975) at 69.

speak for him and present his case, and he must do it to the best of his ability, without making himself the judge of its correctness, but only of its honesty.   Cicero makes the distinction that it is the duty of the Judge to pursue the truth, but it is permitted to an advocate to urge what has only the semblance of it.

[58]     I agree  with  Mr Crossland  that  the  combination  of  allegations,  including conscious misuse of mortgagee power was one step too far.  That technical allegation may imply dishonest intent to cheat Mr Le Prou.  There was no evidence of this.  Mr McKendrick erred in pleading that aspect.  But when it is set within the full context, it was an honest mistake and not sufficient to attract a wasted costs order.

Costs on this application

[59]     The parties may file memoranda on this application within 10 days.  While I am persuaded that a wasted costs order was not warranted, I am inclined to the view that this application was justified by the erroneous pleadings.  I will leave it to the

parties to determine whether they need to litigate this aspect.

Whata J