Elitzur v Ecolibrium Biologicals Limited
[2020] NZHC 2241
•31 August 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-2752
[2020] NZHC 2241
UNDER THE Companies Act 1993 IN THE MATTER OF
the liquidation of ECOLIBRIUM BIOLOGICALS LIMITED
BETWEEN
G ELITZUR
Plaintiff
AND
ECOLIBRIUM BIOLOGICALS LIMITED
Defendant
Hearing: On the papers Appearances:
LC Sizer & C Ottow for the Plaintiff D Hayes for the Defendant
Judgment:
31 August 2020
RESERVED JUDGMENT OF ASSOCIATE JUDGE SMITH (COSTS)
This judgment was delivered by me on 31 August 2020 at 4pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors:
Buddle Finlay, Auckland
New Zealand Commercial Law Corp Ltd, Hamilton
Elitzur v Ecolibrium Biologicals Ltd (costs) [2020] NZHC 2241 [31 August 2020]
[1] On 4 August 2020 I gave a reserved judgment following a defended hearing on an application by the plaintiff (Mr Elitzur) for an order liquidating the defendant (Ecolibrium).1 As the liquidation proceeding had not been advertised, no liquidation order could be made, but I made findings that Ecolibrium had failed in its pleaded defences, and that the liquidation proceeding should go ahead on the basis that Ecolibrium is liable for the full amount pleaded in Mr Elitzur’s statement of claim. I adjourned the liquidation claim to the list on 30 September 2020 to allow time for advertising.
[2] I found that Mr Elitzur was entitled to costs, but there is an issue as to whether he is entitled to full indemnity costs or merely scale costs under the High Court Rules 2016. I invited memoranda from counsel on the quantum of the costs order which should be made, and I have since received and considered memoranda from both counsel.
[3]I now give judgment on Mr Elitzur’s claim for indemnity costs.
Background
[4] The nature of Mr Elitzur’s claim is fully set out in my judgment of 4 August 2020, and there is no need to repeat it here. It is enough to note that Mr Elitzur is an Israeli citizen who entered into a contract with Ecolibrium (the Agreement), under which he would provide certain consultancy services to Ecolibrium in exchange for payment at the rate of US$6,000 per month. Ecolibrium is a start-up company in the biological pesticides field, and it was experiencing cashflow difficulties during the period Mr Elitzur was engaged to provide the consultancy services. In the event, it paid nothing to Mr Elitzur, and he eventually issued a statutory demand under the Companies Act 1993. The liquidation proceeding was commenced when Ecolibirum failed to comply with the statutory demand.
1 Elitzur v Ecolibrium Biologicals Ltd [2020] NZHC 1929.
Mr Elitzur’s costs claim
[5]Mr Eltizur seeks solicitor/client costs of $30,683 and disbursements of
$1,767.96, under an “indemnification” clause in the Agreement.
[6]The indemnification clause (“Clause 8”) reads:
8. Indemnification
Notwithstanding any other term of this Agreement [Ecolibrium] shall indemnify, defend and hold harmless [Mr Eltizur], heirs and assigns (the “Indemnitees”), against any claim, liability, cost, damage, deficiency, loss, expense or obligation of any kind or nature (including without limitation reasonable attorneys’ fees and other costs and expenses of litigation) incurred by or imposed upon the Indemnitees or any one of them in connection with any claims, suits, actions, demands or judgments arising out of this Agreement (including, but not limited to, actions in the form of tort, warranty, or strict liability).
[7] Under r 14.6(4)(e) of the High Court Rules 2016, the Court may order a party to pay indemnity costs if the party claiming costs is entitled to indemnity costs under a contract or deed.
[8] In Fernyhough v The Freight People Ltd, the Court held that an entitlement to indemnity costs is not subject to the Court’s usual discretion as to costs, but rather involves an assessment as to whether the steps taken were within the ambit of the clause, whether it was reasonable to take those steps, and whether the rates at which the work was charged were reasonable.2
[9] With his memorandum, Mr Sizer provided copies of his firm’s invoices making up the $30,683 claimed for costs. Invoices for service fees relating to the statutory demand and the notice of proceeding were also provided, together with an invoice for
$211.38 relating to charges for courier fees.
[10] For comparison purposes only, Mr Sizer provided a table setting out the costs to which Mr Elitzur would be entitled if scale costs were awarded under Category 2, Band B of the High Court Rules. The 2B costs amount would be $11,233.
2 Fernyhough v The Freight People Ltd [2012] NZHC 2638 at [53].
Ecolibrium’s opposition
[11]For Ecolibrium, Mr Hayes made the following submissions:
(1)The Agreement was drafted by Mr Elitzur, so the contra proferentem rule of interpretation applies. Any ambiguity in the interpretation of Clause 8 should be resolved against Mr Elitzur as the party responsible for preparing the Agreement.
(2)Any liability under Clause 8 had to arise “out of this Agreement”. That condition has not been met in the present case, as the liquidation proceeding is not a private debt collection proceeding but a proceeding relating to Ecolibrium’s status, and in particular its ability to pay all of its creditors as their debts fall due for payment. The costs of a proceeding to determine whether or not Ecolibrium is solvent are not costs arising “out of” the Agreement.
(3)On its true construction, Clause 8 was intended to apply to any third party claims that might be made against Mr Elitzur. That interpretation is supported by the use of the words “including, but not limited to, actions in the form of tort, warranty, or strict liability” near the end of Clause 8. If Clause 8 were construed as covering claims between the parties to the Agreement, the (nonsensical) result would be that Ecolibrium would be obliged to indemnify Mr Elitzur in respect of any breach of contract claim it might have against him. Objectively, Clause 8 must relate to indemnification of third party liabilities; it is not available for enforcement action by Mr Elitzur. Recovery of enforcement costs would be covered separately as part of any debt collection term, not covered by a broad indemnity clause such as Clause 8.
(4)An indemnification clause is additional to a contract, and requires separate consideration to be agreed by deed. There was no separate consideration agreed in this case, so Clause 8 is unenforceable.
(5)If the Court considers that Clause 8 applies, the amounts claimed by Mr Elitzur are in any event excessive, unreasonable, or have been charged for services that were not relevant to the proceeding.
Discussion and conclusions
Interpretation of the indemnification clause
[12] The Agreement was stated to be governed by the laws of England, and I accept Mr Hayes’ submission that English law should be applied in construing the Agreement.
[13] On the interpretation principles to be applied, Mr Hayes referred to the decision of the UK Supreme Court in Wood v Capita Insurance Services Ltd, where Lord Hodge, giving the judgment of the Court, said:3
[10] The Court’s task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement. It has long been accepted that this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the Court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning.
…
[11] Interpretation is … a unitary exercise; where there are rival meanings, the Court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense. But in striking a balance between the indications given by the language and the implications of the competing instructions the Court must consider the quality of the drafting of the clause … and it must also be alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest … similarly, the Court must not lose sight of the possibility that a provision may be a negotiated compromise or that the negotiators were not able to agree more precise terms.
…
[12] This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated … To my mind once one has read the language in dispute and the relevant parts of the contract that provide its context, it does not matter whether the more detailed analysis commences
3 Wood v Capita Insurance Services Ltd [2017] UKSC 24; [2017] AC 1173; [2017] 2WLR 1095 at [10]-[12].
with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the Court balances the indications given by each.
[citations omitted]
Interpretation of the Agreement in this case
[14] I accept Mr Hayes’ submissions on this issue. Clause 8 was in my view intended to provide an indemnity for Mr Elitzur against third party claims which might be made against him.
[15] The background circumstances known to both parties when the agreement was made, included the fact that Mr Elitzur had contacts who might be willing to help fund Ecolibrium’s activities. The parties would have anticipated that Mr Elitzur would be doing some “selling” of Ecolibrium to potential investors, and in so doing he would be at risk of claims being made against him by any person who invested and then found that the investment did not meet their expectations. The risk of allegations of “over selling” being made against Mr Elitzur, amounting to misrepresentations, would have been within the contemplation of reasonable parties negotiating the Agreement.
[16] Turning to the wording of Clause 8, I think third party claims against Mr Elitzur were the obvious and primary target of the clause. Mr Hayes highlighted the reference near the end of Clause 8 to “actions in the form of tort, warranty, or strict liability”, and I agree that those words, although only illustrative of the kinds of action for which indemnity would be available, are more apt to describe a third party against Mr Elitzur than a claim by him to recover his fees under the Agreement.
[17] That said, I accept Mr Sizer’s submission that, on a literal reading of the Clause 8, it can be said that the legal fees charged to Mr Elitzur constituted a “cost, or expense”, and that his liability for the fees was “incurred in connection with a claim, suit, action, demand or judgment”. Further, I accept that the present proceeding can reasonably be described as a “claim, suit, action, demand, and judgment” arising “out of the Agreement”.
[18] If Mr Elitzur’s submission is correct, the wording of Clause 8 should make commercial sense regardless of whether it is applied to a third party claim against Mr Elitzur or whether it is applied to a claim by Mr Elitzur against Ecolibrium for unpaid consultancy fees. The problem for Mr Elitzur is that applying Clause 8 to a case such as the present would require qualifications which are simply not present in Clause 8, in order to avoid outcomes (which might be open on the strict wording of Clause 8) that the parties clearly could not have intended.
[19] One of them was identified by Mr Hayes in his submissions. If a situation arose where Ecolibrium was suing Mr Elitzur for non-performance under the Agreement, on the reading of Clause 8 advanced for Mr Elitzur the clause would apply. Ecolibrium would have to indemnify Mr Elitzur in respect of his liability to Ecolibrium. I agree with Mr Hayes that that would be a nonsensical result, as it would effectively preclude Ecolibrium from ever recovering damages from Mr Elitzur, regardless of the extent or seriousness of any breach of contract he might have committed.
[20] The second significant difficulty with the interpretation advanced for Mr Elitzur is that, if it were correct, Ecolibrium would appear to be liable to meet Mr Elitzur’s legal fees incurred in a claim to recover his consultancy fees, even if his claim turned out to be unsuccessful. Mr Elitzur might sue for unpaid consultancy fees but his claim might fail, possibly because of a set-off successfully argued by Ecolibrium in response. It might be argued that Mr Elitzur’s legal fees incurred in pursuing such a claim would not be “reasonable”, but what if the Court considered that the arguments advanced for Mr Elitzur, although unsuccessful, were nevertheless reasonable?
[21] The entire focus of Clause 8 seems to me to be on the situation where Mr Elitzur is, or at least might, be liable, or to put it colloquially “in the wrong”, on a matter which is the subject of the relevant claim, suit, action, or demand. If he was in the wrong in a third party claim against him, but was still entitled to be indemnified by Ecolibrium (including for his legal fees), why (on Mr Elitzur’s interpretation of the clause) would he not also be entitled to his legal fees if he was in the wrong in a claim against Ecolibrium?
[22] I think it highly improbable that the parties would have intended that Ecolibrium would have to pay Mr Elitzur’s legal costs, even if it were successful in resisting a claim brought by him for his fees. Yet I think we would be driven to that conclusion if Mr Elitzur’s reading of Clause 8 were correct.
[23] The two examples I have considered illustrate the difficulties of endeavouring to fit within Clause 8 claims between the parties where one is alleging breach by the other party, of other clauses of the Agreement. There are cases where, without doing undue violence to the wording of the section, the result could not be one that the parties intended.
[24] Those difficulties do not arise if the clause is interpreted as applying to third party claims only, and I think that interpretation is clearly available on the wording of the section. First, the concept of “indemnifying, defending and holding harmless” the consultant seems more apt to describe a situation where some claim is being made against the consultant, than one where the consultant himself commences a claim. This case did not begin as one where Mr Elitzur needed protection against some claim, liability, cost, expense or obligation, and I think the words “deficiency”, and “loss”, must be construed as referring to a situation similar in nature to that described by the words around them. On that basis, Mr Elitzur did not come within the wording that appears immediately before the brackets in the fourth line of Clause 8: he was not subject to any claim or possible liability, or expense, or obligation. All that had happened was that he had not been paid his fees.
[25] To get home on his argument, I think Mr Elitzur had to contend that the “reasonable attorneys’ fees and other costs and expenses of litigation” referred to in Clause 8 constitute a stand-alone basis for the claim to indemnity. But I do not think that is the correct reading of the clause. The legal fees and litigation expenses were arguably already covered by the words “cost” or “expense” which come before the brackets, so it seems more likely that the words within the first set of brackets in Clause 8 were intended to do not more than provide clarification of the scope of the expression “claim, liability, cost …” which immediately preceded the brackets. The bracketed words were not intended to create some new, stand-alone basis for indemnification.
[26] I think the purpose of the clarification is clear enough. The words before the first set of brackets made it clear that if some third party sued Mr Elitzur for something which could be said to have arisen out of the Agreement, Ecolibrium would stand behind him in respect of the amount claimed. But would Ecolibrium also cover his legal costs of defending the third party claim? That is the question that is answered, in the affirmative, by the words within the first set of brackets in Clause 8.
[27] Looking at the Agreement as a whole, I do not see anything that would suggest a different interpretation of Clause 8. If anything, the contrary is the case. One would ordinarily expect to see a clause entitling a party to a contract to recover its legal costs of any enforcement action in a clause or clauses dealing generally with defaults under the contract, and the innocent party’s remedies in the event of default. One would not normally expect to find a provision concerned with available remedies on default hidden within a clause dealing with one party’s obligation to indemnify the other in certain “trigger” situations. In this case, there is no specific “remedies” provision providing for the recovery of full solicitor/client costs on any enforcement action.
[28] If Mr Elitzur’s reading of Clause 8 were correct, the question also arises why Ecolibrium would have agreed to Mr Elitzur having the right to recover full indemnity costs on any necessary enforcement action, while it had no such right if the boot was on the other foot. If Ecolibrium had been obliged to issue a proceeding against Mr Elitzur for breach of the Agreement in Israel, it would no doubt have been just as keen as Mr Elitzur to negotiate the right to recover its solicitor/client costs of the proceeding.
[29] Another provision of the agreement that confirms that the parties were clearly focussed on Mr Elitzur’s exposure to possible claims against him was cl 9, dealing with insurance. Under this clause, Ecolibrium agreed to maintain a directors and officers liability insurance policy covering all risks and exposures for the role of consultant as an officer of the company.
[30] For completeness, I record my view that Farstad Supply AS v Enviroco4 does not assist Mr Elitzur. The case considered a clause in a charterparty that was described as expressly including both exclusion and indemnity provisions, and the UK Supreme Court held that the clause was effective to exclude any claims by the owner of the vessel against the charterer. I am not concerned in this case with a claim that Clause 8 was intended to exclude Ecolibrium’s liability to Mr Elitzur for the consultancy fees
– Clause 8 clearly had no such intention (the consultancy fees were expressly payable under cl 3 of the Agreement).
[31] Considering all those factors, I conclude that Clause 8 does not apply in the present situation, and Mr Elitzur is not entitled to indemnity costs under the clause.
[32] Having concluded that Clause 8 does not apply to the present claim for costs, there is no need for me to address Mr Hayes’ other arguments opposing the indemnity costs claim.
[33] Mr Hayes accepts that an award of costs in Mr Elitzur’s favour on a 2B basis is appropriate. I agree with that view.
[34] In his submissions, Mr Sizer set out an alternative costs claim on a 2B basis, in the sum of $11,233. He provided a table setting out his calculation of that figure, and Mr Hayes did not take issue with the table in his submissions.
[35] The costs claimed in Mr Sizer’s table appear to me to be properly claimed, but I think it appropriate to make some downward adjustment to reflect the fact that Ecolibrium has been substantially successful on the costs argument. I will deduct $956 from the amount claimed by Mr Elitzur, reflecting 0.4 days under Schedule 3 to the High Court Rules, at the Category 2 rate, for Mr Hayes’ costs memorandum. The resulting costs award to Mr Elitzur will be $10,277, and there will be a costs order accordingly. In addition, I award disbursements to Mr Elitzur in the sum of $1,767.96 as claimed.
4 Farstad Supply AS v Enviroco [2010] UKSC 18; [2010] 2 Lloyds Rep. 387 at [59].
[36] The total amount for costs and disbursements payable to Mr Elitzur is accordingly $12,244.96, and I order Ecolibrium to pay that sum to him.
Ecolibrium’s application for an order restraining publication and advertisement
[37] The costs issue now having been determined, there is no longer any continuing basis for the application for orders restraining publication and advertising of the liquidation proceeding. That application is dismissed accordingly. In addition, the interim orders I made on 4 August 2020 that no details of the proceeding were to be advertised or otherwise published, and the subsequent extension of that order, are now revoked. Similarly, the order I made at the hearing on 13 July 2020 suppressing details of that hearing pending further order of the Court is revoked.
Associate Judge Smith
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