Downer v Signature Developments Limited
[2020] NZHC 3157
•30 November 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV 2019-404-000544
[2020] NZHC 3157
BETWEEN MALCOLM ROBERT DOWNER
Plaintiff
AND
SIGNATURE DEVELOPMENTS LIMITED
Defendant
Hearing: On the papers Counsel:
M J W Lenihan for the Plaintiff
R Amaranathan for the Defendant
Judgment:
30 November 2020
COSTS JUDGMENT OF VAN BOHEMEN J
This judgment was delivered by me on 30 November 2020 at 3.30pm Pursuant to Rule 11.5 of the High Court Rules
…………………………
Registrar/Deputy Registrar
Solicitors/Counsel:
Alan Jones Law Limited, Auckland M J W Lenihan, Barrister, Auckland Rice Craig, Papakura
DOWNER v SIGNATURE DEVELOPMENTS LIMITED (Costs Judgment] [2020] NZHC 3157 [30 November 2020]
Introduction
[1] On 23 September 2020, I delivered judgment in these proceedings in favour of the plaintiff, Mr Downer.1 I held that:
(a)The defendant, Signature Developments Ltd (Signature), breached an essential term of an agreement for sale and purchase (ASP) it entered into with Mr Downer;
(b)Mr Downer was entitled to cancel the ASP in accordance with s 37 of the Contract and Commercial Law Act 2017 (CCL Act); and
(c)Mr Downer was entitled to be repaid the sum of his deposit advanced under the ASP, $466,000.00, and made orders as such.
[2] In accordance with directions in my judgment, Mr Lenihan filed a memorandum seeking costs on behalf of Mr Downer and Ms Amaranathan filed a memorandum in reply.
[3] Mr Downer seeks 2B costs of $40,133.00 together with an uplift of 30 per cent, totalling $52,172.90, as well as disbursements of $3,109.51 (excluding GST).
[4] Ms Amaranathan does not dispute that costs should be awarded on a 2B basis or Mr Lenihan’s calculation of costs on that basis. She submits, however, that an uplift on scale costs is not warranted.
The parties’ positions
Submissions for Mr Downer
[5] Mr Lenihan submits that a 30 per cent increase on scale costs is warranted in accordance with r 14.6(3)(b)(ii) of the High Court Rules 2016 because Signature pursued a position lacking in merit.
1 Downer v Signature Developments Ltd [2020] NZHC 2488.
[6] Mr Lenihan refers to a letter dated 19 March 2019 from Mr Downer’s solicitors to Signature’s solicitors which put Signature on notice that proceedings would be instituted if it did not return Mr Downer’s deposit. Mr Lenihan says the letter recorded that, in a letter dated 1 March 2019 to Mr Downer’s solicitor, Signature’s solicitor did not deny propositions put by Mr Downer’s solicitors in an earlier letter that:
(a)Signature was under no obligation under the Property Law Act 2007 (PLA) to assign the Agreement to Lease to Pukekohe Educare Ltd. The situation arose through clear error on the part of Signature’s solicitor;
(b)Signature breached cl 26 of the ASP;
(c)Signature breached its duties under the ASP as a constructive trustee for failing to consult with Mr Downer about either the assignment of the Agreement to Lease (ATL) or the terms of the Deed of Lease;
(d)Signature’s solicitor had a number of conflicts of interest.
[7] Mr Lenihan says the fact Signature’s solicitors did not dispute these points should have given Signature pause for thought. He also says that the rest of the 19 March 2019 letter “reasonably closely mirrored” the findings in my judgment, namely:
(a)The performance of cl 26 of the ASP was “obviously essential” to Mr Downer as Kindergarten New Zealand Ltd (KiNZ) was named as a tenant;
(b)Had cl 26 been performed, Mr Downer would have had the right to approve a new tenant and the security provided;
(c)The position of Signature that Mr Downer would have been obliged to approved Pukekohe Educare as a tenant was rejected and it was not simply a matter of considering the offer of a one-year bank guarantee;
(d)Because Signature did not have KiNZ execute a Deed of Lease,
Mr Downer lost the benefit of recourse through s 241 of the PLA; and
(e)Signature had a conflict of interest because it was coming under commercial pressure from KiNZ and it breached cl 26 in the course of “placating” KiNZ.
[8] Mr Lenihan submits that “reflection was clearly required by Signature at that point,” but instead it pursued a defence “wholly lacking in merit” and one which “was inevitably going to result in a judgment in favour of Mr Downer.” Mr Lenihan submits this conduct, reflected throughout litigation and before it, was “disgraceful treatment of a serious investor” who should not have been made to go to Court and obtain the deposit he was “clearly entitled to” from the beginning.
Submissions for Signature Developments Ltd
[9] Ms Amaranathan rejects Mr Lenihan’s characterisation of Signature’s conduct for the purposes of r 14.6(3)(b)(ii). Ms Amaranathan submits:
(a)The letter dated 19 March 2020 was not part of the conduct of the litigation because it preceded the proceedings;
(b)The “conflict of interest” asserted by Mr Lenihan was not pleaded and was not an issue in the proceedings and, therefore, is not relevant to the Court’s costs determination; the main issue was the breach of cl 26;
(c)Signature’s position on the alleged breach – that the identity of the tenant was not an essential term – was not inherently unlikely to succeed because Signature genuinely believed that an assignment of the lease to Pukekohe Educare would ensure that Mr Downer received a property with a committed tenant;
(d)Similarly, Signature’s position that Mr Downer would not have been able to refuse an assignment of the lease was not inherently unlikely to
succeed because the landlord’s right to refuse consent to an assignment was limited by the criteria in cl 33.1 of the Lease;
(e)Signature’s position on the loss of benefit of s 241 of the PLA, namely that it would not substantially reduce the benefit of the ASP because the prospect of relying on it was remote, was also not inherently unlikely to succeed; and,
[10] Ms Amaranathan says Mr Lenihan’s remaining arguments as to Signature’s conduct during litigation relate to conduct preceding the litigation and cannot form the basis for an uplift. The only relevant conduct was the settlement offer and the fact Mr Downer had to attend Court. With regard to the settlement offer, Ms Amarnathan says settlement discussions between Mr Hunt and Mr Downer happened “at least” twice, including once at Mr Downer’s home where Mr Hunt offered to refund all money paid by Signature less the commission paid, Signature’s legal fees and re- marketing costs. Ms Amaranathan submits this is not high-handed conduct.
[11] Otherwise, Signature submits that there was no finding that Signature was placating KiNZ and that it was in its own commercial interests to agree to the assignments, which in two cases it could not reasonably have refused, and that the agreement with KiNZ was a “package deal” and also in Mr Downer’s interests.
[12] For these reasons, Ms Amaranathan submits that no uplift is justified. She notes, in particular, that while a “significant” aspect of the Court’s finding was that Signature was obliged to consult with Mr Downer, a failure to consult was not pleaded by Mr Downer, nor was a failure to obtain his consent, and that the case turned on contractual interpretation and findings of fact.2 She submits it does not follow from one party’s “strong success” in a proceeding that the other party’s claim was devoid of merit.
2 Ms Amaranathan references Nandro Homes Ltd v Datt HC Auckland CIV-2008-404-006676, 13 July 2009, at [11] in support of the proposition that a simple failing of factual or legal argument is not, of itself, a sufficient basis upon which increased costs can be awarded for lack of merit, except where it is “obvious and incontrovertible” so that there is no reasonable possibility a court may find differently, citing N-Tech Ltd v Abooth Ltd [2012] NZHC 1167 at [108].
Legal principles
[13] Rule 14.6 of the High Court Rules provides that increased costs may be ordered where there is a failure by the paying party to act reasonably.3
[14] Under rr 14.6(3)(b)(ii) and (iii), the Court may order increased costs if the party opposing costs contributed unnecessarily to the time or expense of the proceeding by taking an argument that lacks merit or failing without reasonable justification to accept a legal argument.
Discussion
[15] I am satisfied that this is a case in which increased costs are appropriate. I consider that Signature did take a position lacking merit in the meaning of r 14.6(3)(b)(ii) and failed to accept a legal argument without reasonable justification in the meaning of r 14.6(3)(b)(iii).
[16]As stated at [113] of my judgment, I found that:
(a)Signature had breached cl 26 of the ASP by consenting to the assignment of the ATL without seeking and obtaining the approval of Mr Downer;
(b)It was also clear that Signature would have been in breach of cl 26 at settlement of the ASP because KiNZ would not have been the tenant of the centre as required by cl 26;
(c)Signature and Mr Downer had agreed when signing the ASP that performance of cl 26 was essential to Mr Downer, there had not been sufficient and substantial performance of cl 26, with the consequence that Mr Downer had the right to cancel the ASP in accordance with s 37(2)(a) of the CCL Act;
(d)The assignment of the ATL substantially reduced the benefit of the ASP to Mr Downer with the consequence that Mr Downer had the right to cancel the agreement for sale and purchase in accordance with s 37(2)(b) of the CCL Act.
3 Bradbury v Westpac Banking Corp [2009] 3 NZLR 400, (2009) 19 PRNZ 385 (CA) at [27].
[17] All of these findings were directly contrary to the positions advanced by Signature in its dealings with Mr Downer from the time he learned of the assignment of the ATL to Pukekohe Educare and in the present proceeding.
[18] As recorded at [91], I found that all parties recognised that the tenancy of KiNZ was a major consideration in the investment. With respect to cl 26, at [92] I found that the clause was “emphatic and without qualification or conditions” and “precise”. It identified KiNZ by name and said KiNZ would be the tenant on the terms set out in the ATL. I also found that the identity of KiNZ as the tenant had been underscored by email communications between Signature’s agents and Mr Downer, and had been central to the agents’ ‘pitch’ of the proposed investment to Mr Downer.
[19] Given these findings, I agree with Mr Lenihan that in pursuing the argument that the identity of the tenant was not an essential term was to pursue an argument that was inherently unlikely to succeed and was without real merit, particularly once Mr Downer had made it clear to Signature that he was not willing to accept Pukekohe Educare in KiNZ’s place. It is one thing for Signature to try to persuade Mr Downer in a negotiation that Pukekohe Educare was at least as good a tenant as KiNZ. It is quite another to assert in Court that a provision in an agreement that identified a tenant by name and which confirmed that the purchaser of the property had received and approved of the agreement to lease with that tenant did not mean that the identity of the tenant was not an essential term.
[20] Therefore, it should have been clear to Signature at the commencement of litigation and throughout it that its position lacked merit. I am satisfied that, in pursuing that position, Signature contributed unnecessarily to the time and expense of the proceeding.
[21] I do not accept Ms Amaranathan’s submission that a “significant” part of the Court’s finding against Signature hinged on a failure to consult Mr Downer and obtain his consent which were not pleaded and required the Court’s contractual interpretation and findings of fact to resolve.
[22] The failure to consult and obtain Mr Downer’s consent were directly related to Signature’s unwillingness to accept the obvious – that the identity of the tenant was a major consideration in Mr Downer’s investment, and the loss of KiNZ as tenant would be likely to cause Mr Downer to reconsider whether to proceed with the investment. As I said at [79]:
… the contrast between what Signature Developments knew and what it told Mr Downer between August 2018 and December 2018 invites the conclusion that Signature Developments deliberately chose to keep Mr Downer in the dark about the proposed assignment until it had been completed, and chose to prefer its commercial relationship with KiNZ and AKA over its obligations to Mr Downer.
[23] Nor do I accept Ms Amaranathan’s submission that there was merit in Signature’s position that assignment of the ATL did not “substantially reduce” the value of the ASP to Mr Downer because Pukekohe Educare was also a valuable tenant. If, as I found, the identity of the tenant was a major consideration for Mr Downer, the value or otherwise of a replacement tenant installed without Mr Downer’s knowledge does not significantly reduce the nature or extent of the breach. That was also a key consideration my findings that Signature had not substantially performed cl 26 of the ASP and that the assignment of the ATL to Pukekohe Educare substantially reduced the value of the ASP to Mr Downer. All of the arguments Signature advanced on the latter question failed to counter that basic point.
[24] I consider r 14.6(3)(b)(iii) is also engaged because Signature failed to accept the legal arguments put to it by Mr Downer’s solicitor that it was in breach of the ASP. Given the clear terms of cl 26, I consider it was unreasonable for Signature to oppose Mr Downer’s application to retrieve his deposit. Time and cost were unnecessarily wasted in doing so.4
[25] For these reasons, I agree that Signature should have reflected and made a serious effort to settle with Mr Downer. Whether Signature had one or two settlement offers to Mr Downer, the suggestion that Mr Downer should bear the costs of Signature
4 In the meaning of a “failure to act reasonably contribut[ing] to the time and expense of the proceeding” as stated in Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2010] NZCA 400, (2010) 24 NZTC24,500 at [165], in reliance on Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] 3 NZLR 400 at [27].
re-marketing the property after Mr Downer had cancelled the ASP because of Signature’s breach was hardly a serious offer. Regrettably, it is consistent with Signature’s behaviour towards Mr Downer as found at [111] of my judgment:
… Signature Developments acted poorly towards Mr Downer in not telling him of KiNZ's wish to assign the ATL and in consenting to the assignment without seeking or obtaining Mr Downer's approval. Their behaviour was high-handed and inconsiderate of the interests of a serious investor who had made a considerable contribution towards Signature Developments achieving its commercial goals.
[26] For all these reasons, I consider an increase on scale costs is appropriate. I am also satisfied that an uplift of 30 per cent is appropriate.
Result
[27]I award Mr Downer:
(a)Costs of $52,173.00, being scale costs of $40,133.00, with an uplift of 30 per cent or $12,040.00;
(b)Disbursements of $3,575.94 (incl GST).
G J van Bohemen J
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