Flanaghan v Helmore Bowron & Scott

[2018] NZHC 2302

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2015-409-96

[2018] NZHC 2302

BETWEEN

PAUL FLANAGHAN

Plaintiff

AND

HELMORE BOWRON & SCOTT

Defendant

Hearing:

3 September 2018 (On the papers)

Appearances:

A Riches for Plaintiff

M Parker and A Gaborieau for Defendant

Judgment:

3 September 2018

JUDGMENT OF MANDER J

Introduction

[1]        On 28 April 2017, I entered judgment for the plaintiff, Mr Flanaghan, in the sum of $143,242, just shy of half the sum sought.1 Reserving costs, I commented that "both parties are entitled to claim some success on the outcome of the proceeding".2

[2]        The parties have been unable to agree costs and now seek orders from the Court.

Background

[3]        Mr Flanaghan sued his solicitors, the defendants Helmore Bowron & Scott (HBS), claiming they acted negligently and in breach of contractual and fiduciary

1      Flanaghan v Official Assignee [2017] NZHC 833.

2 At [169].

FLANAGHAN v HELMORE BOWRON & SCOTT [2018] NZHC 2302 [3 September 2018]

duties by acting for both him and his accountant, Ms McIntyre, with whom he had also been in a personal relationship. HBS acted for both in relation to two transactions. The first was the joint purchase of a property (the property) by Mr Flanaghan and Ms McIntyre, in respect of which the funds were entirely provided by Mr Flanaghan. The second was a $50,000 bank loan taken out by Ms McIntyre, secured by first charge mortgage against the property and a personal guarantee from Mr Flanaghan.

[4]        HBS did not contest a finding that they breached their duties. At trial, the main issue in dispute was whether Mr Flanaghan could prove he had suffered loss as a result of the breaches. Mr Flanaghan maintained that had he been given independent legal advice he would not have entered into the joint property purchase or provided the personal guarantee for the bank loan. I found in favour of Mr Flanaghan in relation to the property purchase, but not the bank loan.

[5]        Mr Flanaghan had mixed success in his claims of loss, and also failed in his application to be indemnified by HBS for potential tax losses arising from any future sale of the property.

The positions of the parties on costs

[6]        Mr Riches for the plaintiff maintains Mr Flanaghan, while not recovering the full amount of the quantum sought, has broadly been the successful party. He says Mr Flanaghan was substantively successful in recovering his losses, namely the cost of removing Ms McIntyre from the title of the property (including legal fees) and the cost of a settlement with the Official Assignee. He seeks 2B costs of $37,464 and disbursements of $15,777.40.

[7]        Mr Parker for the defendant says that in the final outcome both parties had similar success. Mr Flanaghan recovered 49 per cent of the amount he claimed. However, he submits the plaintiff acted unreasonably at and following a settlement meeting before trial, and this "strongly militates against a situation where parties bear their own costs" from that date. He submits HBS should be awarded its costs from 25 May with a 50 per cent uplift - a total claim of $53,854.50 2B costs and $23,377.01 disbursements.

The law

[8]The overriding principle is that costs are at the discretion of the Court.3 Rule

14.2 of the High Court Rules sets out general guiding principles to be applied in the exercise of this discretion. These include that the party who fails with respect to a proceeding or an interlocutory application should pay costs to the party who succeeds and so far as possible the determination of costs should be predictable and expeditious.

[9]        Where both parties have enjoyed a measure of success, costs should be awarded on the basis of proportionality of that success. In assessing proportionality the correct approach is not to merely tally up the number of issues each party succeeded in, but to assess "how the actual conduct of the case differed from that reasonably required to secure the actual result."4 The underlying principle is that parties are entitled to costs incurred in achieving a successful cause of action or defence.

[10]      Rule 14.6 sets out circumstances where the Court can award increased costs. The relevant provisions read:

(3)The court may order a party to pay increased costs if—

…

(b)the party opposing costs has contributed unnecessarily to the time or expense of the proceeding or step in it by—

…

(ii)        taking or pursuing an unnecessary step or an argument that lacks merit; or

(iii)       failing, without reasonable justification, to admit facts, evidence, documents, or accept a legal argument; or

…

(v)      failing, without reasonable justification, to accept an offer of settlement whether in the form of an offer under rule
 14.10 or some other offer to settle or dispose of the proceeding; or

…

3      High Court Rules, r 14.1.

4      Paper Reclaim v Aotearoa International Ltd (2007) 18 PRNZ 743 (CA).

(d) some other reason exists which justifies the court making an order for increased costs despite the principle that the determination of costs should be predictable and expeditious.

…

[11]      Rule 14.7 sets out situations where the Court may reduce or refuse the successful party’s costs:

Despite rules 14.2 to 14.5, the court may refuse to make an order for costs or may reduce the costs otherwise payable under those rules if—

…

(d) although the party claiming costs has succeeded overall, that party has failed in relation to a cause of action or issue which significantly increased the costs of the party opposing costs; or

…

(f)the party claiming costs has contributed unnecessarily to the time or expense of the proceeding or step in it by—

(i)failing to comply with these rules or a direction of the court; or

(ii)taking or pursuing an unnecessary step or an argument that lacks merit; or

(iii)failing, without reasonable justification, to admit facts, evidence, or documents, or accept a legal argument; or

(iv)failing, without reasonable justification, to comply with an order for discovery, a notice for further particulars, a notice for interrogatories, or other similar requirement under these rules; or

(v)failing, without reasonable justification, to accept an offer of settlement whether in the form of an offer under rule 14.10 or some other offer to settle or dispose of the proceeding; or

(g)some other reason exists which justifies the court refusing costs or reducing costs despite the principle that the determination of costs should be predictable and expeditious.

[12]      Rule 14.11 also provides that where a written settlement offer without prejudice save as to costs is refused, and the outcome for the refusing party is worse than if they had accepted the offer, the party making the offer is prima facie entitled to

costs incurred in the proceeding after the refusal of the offer. All of these principles and guidelines are subject to the overriding discretion of the Court.5

Success

Elements of the claim

[13]      As I have already observed, Mr Flanaghan was successful in his submission that  had  he  received  independent  legal  advice,  he  would  not  have  allowed   Ms McIntyre to have become a joint owner on the title of the property. While I was critical of much of Mr Flanaghan’s evidence, I was satisfied that he did not appreciate the legal ramifications of the transaction. Ms McIntyre told him she needed to be on the title for unspecified ‘tax reasons’. Ms McIntyre was his accountant, and the property purchase occurred in the context of a burgeoning relationship – the very kind of situation where independent legal advice is necessary.

[14]      However, Mr Flanaghan was unsuccessful in satisfying me that he would not have provided the personal guarantee had he received independent advice. The provision of that  guarantee  was  consistent  with  earlier  support  he  had  given  Ms McIntyre. The transaction was conventional, and Mr Flanaghan cannot have been under a misapprehension as to the responsibility he was accepting. Under cross- examination Mr Flanaghan accepted that he understood what a guarantee was and that he was guaranteeing Ms McIntyre’s loan.

[15]      A significant part of the evidence and my judgment concerned HBS’s unsuccessful contention that Mr Flanaghan’s conduct after its breach constituted an intervening event sufficient to break the chain of causation such that no loss could be proved, or else that Mr Flanaghan’s own negligence contributed significantly to the loss. While I noted Mr Flanaghan was open to criticism for the way he approached the situation after his separation from Ms McIntyre, HBS’s breach remained a proximate and operating cause of the loss. HBS’s submission on contributory negligence relied on the contention that Ms McIntyre was prepared, in May 2012, to release her half share in the property, but I held that unproved on the evidence.

5      Rule 14.11(1).

[16]      Mr Flanagan had mixed success on quantum. As well as the $61,561 claim based on loan guarantee cause of action, Mr Flanagahan failed to secure the $50,000 sought for the increase in the price he paid for a neighbouring property. He claimed that Ms McIntyre still being on the title of the property was a reason he was not able to obtain finance for the purchase when the asking price for the property was lower. While I was satisfied Ms McIntyre’s name on the title created a difficulty in securing finance, the evidence did not prove to the requisite standard that this was the reason it was declined. Mr Flanaghan was also unsuccessful in a $35,000 general damages claim based on ‘stress and uncertainty’. No evidence, medical or otherwise, had been tendered to prove this. Finally, he was unsuccessful in showing the $2,026 cost for forming a family trust was causally connected, and was only awarded $500, rather than $1350, for legal costs for lodging a caveat.

[17]On the $60,000 claim for settlement with the Official Assignee, the claim for

$62,742 associated with removing Ms McIntyre from the title, and the $18,000 IRD liability claim – all of which were contested by HBS – Mr Flanaghan was successful.

[18]      Another aspect of the proceeding which occupied some time at trial was     Mr Flanaghan’s unsuccessful claim for an indemnity for any future tax liability. The New Zealand Transport Agency had expressed interest in purchasing the property as part of the development of a new highway, but Mr Flanaghan was concerned that he may have to pay increased tax on any sale because of his relatively recent acquisition of Ms McIntyre’s share of the property. I expressed reservations as to whether awarding an indemnity would be appropriate or even justiciable, given the unknown and contingent nature of any potential tax liability. In any event, I was not satisfied that such a measure was appropriate given the number of variables and the remoteness of any future loss. The relief was declined, although without prejudice to any future claim against HBS for tax losses that were to be incurred.

Analysis

[19]      Identifying the successful party is an evaluative exercise which involves assessing the proceedings in their entirety. It is not simply a matter of comparing the number of successful and unsuccessful arguments, or comparing the size of the

judgment amount entered against the amount claimed. However, the Court of Appeal have recently affirmed that the general principle that costs follow the event means the party which is found in breach of legal rights, and is adjudged liable to pay the other, will usually pay costs.6 Even if the amount awarded is less than that sought, “success on more limited terms is still success”.7

[20]      In Water Guard NZ Ltd v Midgen Enterprise Ltd the Court of Appeal overturned a finding that the plaintiff, which failed in most of its claims and recovered only $68,000 of its pleaded $500,000, was ‘unsuccessful’. The Court held:8

…the party which fails should pay the costs of the successful party, formalising the paramount rule that costs should follow the event. WGL's success on its defects claims was affirmed by Midgen's later consent to judgment being entered against it for $67,527.97. We agree that Midgen qualified as the unsuccessful party — that is, the party which was adjudged liable to pay money to the other — and that accordingly WGL was the successful party. We disagree with the Judge that WGL lost that status because it failed on most of its claims which in turn occupied most of the trial. That factor can be properly recognised in other ways, such as reducing costs otherwise payable or ordering costs to lie where they fall. However, the final result must ordinarily be given primary weight when exercising the r 14.1 discretion.

[21]      Although the issue of breach of duty was not contested, Mr Flanaghan’s legal position was vindicated. He has also been successful in the face of strong opposition from HBS in establishing a causative link between the breach of duty and measurable loss. Overall I am satisfied, in the light of the Court of Appeal’s statements above, that he was the successful party.

[22]      Nevertheless, that success must be tempered by the fact that on a number of issues, which formed a significant part of his monetary claim, he failed. This will be considered further, but first it is necessary to set out HBS’s claims of unreasonable conduct on which it bases its claim for costs.

6      Water Guard NZ Ltd v Midgen Enterprises Ltd [2017] NZCA 36 at [13].

7      Weaver v Auckland Council [2017] NZCA 330 at [26].

8      Water Guard NZ Ltd v Midgen Enterprises Ltd, above n 7, at [13] (citations omitted).

Unreasonable conduct

[23]      HBS alleges that Mr Flanaghan’s conduct prior to trial was unreasonable in a number of respects, and submits this should be reflected in the Court’s orders as to costs.

Failure to give adequate material

[24]      In January 2016, Mr Parker submits the parties agreed to meet in order to attempt resolution of the dispute on a without prejudice basis save as to costs. HBS’s solicitors, on a number of occasions, stressed the importance of receiving a breakdown of Mr Flanaghan’s claim prior to the meeting. A week before the meeting was to take place a brief breakdown of the claim was provided, including mention of “lost profits” on two properties which had not previously been mentioned (and which in the end were not intended as part of the claim), and an unspecified general damages claim. HBS’s solicitors requested documentation verifying the amounts. Some verification was provided a few days before the meeting, and some of the figures remained unexplained.

The settlement meeting

[25]      Mr Parker submitted that, going into the meeting on 25 May 2016, HBS’s solicitors were authorised to settle for up to $175,000.

[26]      At the meeting, the issue of a tax indemnity was broached for the first time, it having not been mentioned in any of the versions of the statement of claim to that point. At the meeting Mr Flanaghan’s lawyers communicated that the claim had been inflated from $264,000 to $3,400,000 because he now claimed lost profits on the two additional properties mentioned above.

[27]      Mr Parker says this was unreasonable conduct. HBS was put in a position where it was involved in a settlement meeting where it was prepared to settle on the claim as pleaded, and the inflation of the claim rendered the meeting moot. He submits that the inflation of the claim “without any forewarning precluded the Defendant from obtaining any meaningful advice and making a considered settlement offer”.

[28]A week later, less than two months before trial, the claim reverted down to

$264,000. Shortly after this the plaintiff, without leave, then filed a new statement of claim which widened the claims against HBS to include the ultimately unsuccessful claim for a tax indemnity. This required HBS to find an additional expert, and ultimately led to the matter being adjourned, despite Mr Flanaghan’s opposition.

[29]      By reply memorandum, Mr Riches submits that the events surrounding the meeting are inadmissible for the purpose of determining costs. He says in correspondence the meeting was referred to as “without prejudice” with no reservation as to costs. He also submits that regardless of the meeting it was still open to the defendant to make a without prejudice offer exceeding that awarded by the Court, but it chose not to. He says HBS “appears to seek costs on the basis that [Mr Flanaghan] should have worked harder to persuade it to make a higher settlement offer”.

Failure to respond to Calderbank offer

[30]      Mr Parker submitted that his client continued to seek a resolution of the dispute. Its solicitors sent a letter with a detailed analysis of the issues and a Calderbank offer of $100,000. There was no response. After further correspondence Mr Flanaghan’s solicitors said they would take instructions on the offer after receipt of further information. That information was provided, and although a response was eventually received (after a change in Mr Flanaghan’s legal representation), the offer was not directly responded to, and there was no counter-offer.

[31]      Mr Parker argues that this failure to respond to the substance of the offer was unreasonable, and while $100,000 was below what Mr Flanaghan was ultimately awarded, the offer “could have operated as a springboard for further negotiation between the parties which could have avoided the need to go to trial”.

Expert witnesses

[32]      Mr Parker says that the parties’ expert legal witnesses were agreed as to HBS’s breaches. The parties came to an agreement that the experts would confer and produce

a joint statement outlining areas of agreement and disagreement, and that such a statement would probably do away with the need for them to attend the trial.

[33]      Despite this consensus, Mr Parker says that Mr Flanaghan resolved to require his expert witness to attend the trial, saying he would only reconsider his position if HBS conceded that it had acted negligently, in breach of contract and in breach of fiduciary duty. HBS’s solicitors responded saying this would be an inappropriate usurpation of the role of the Court as final arbiter of the law,  but it did say that if   Mr Flanaghan agreed to the joint statement being filed with no evidence called, HBS would not make submissions against the findings of negligence, breach of fiduciary duty, and breach of contract. This proposal was not responded to, and as a result HBS maintains it had “no option but to call its expert” as well.

[34]      Mr Parker submits the experts’ analysis added nothing material beyond what they had agreed in their joint statement, and this added unnecessarily to the cost of proceedings.

[35]      In reply Mr Riches says it was unreasonable for HBS not to concede the breach of duty and negligence points in light of the joint experts’ report. He says he did reply on behalf of his client to HBS’s proposal. That reply, a copy of which Mr Riches attached to his submissions, insists on the concession. Mr Riches maintained such concessions were “routinely made in litigation to ensure the court’s time is widely used”. Mr Riches expressed the view that the joint experts’ report did not go far enough, and did not sufficiently ameliorate the litigation risk from not calling is expert witness.

Pursuing unreasonable lines of legal argument

[36]      Mr Parker submits Mr Flanaghan’s tax indemnity argument lacked merit and had very little prospect of success. He highlights the statements in the judgment as to the lack of authority cited for Mr Flanaghan’s contention, and my significant reservations as to whether such a claim was even justiciable. Further, Mr Flanaghan’s own tax expert conceded there was a 75 per cent probability that Mr Flanaghan could successfully defend any alleged tax liability. Mr Parker says this unreasonable line of

argument added unnecessarily to the cost of the proceeding for HBS because it required it to engage a tax expert.

[37]      Mr Parker further submitted that Mr Flanaghan’s claim based on the loan guarantee was baseless and without prospect of success, highlighting that his oral evidence was inconsistent with his brief when he conceded he understood what a guarantee of a loan was.

[38]      Mr Riches rejects that it was unreasonable to seek the tax indemnity. He says there was authority for such a remedy, although that was not accepted by the Court. Nor does he accept it was unreasonable to seek damages on the loan guarantee. He notes in that regard that the argument did not fail because the defendant was not shown to have been in breach of its duty.

Analysis

[39]      Mr Parker submits that the plaintiff’s conduct in combination is such that the Court should award HBS scale costs with a 50 per cent uplift from the date of the settlement conference under r 14.6. In light of my finding that Mr Flanaghan is to be viewed overall as the successful party, I consider such an order would be disproportionate and inappropriate. Nevertheless, I agree that some of Mr Flanaghan’s conduct prior to trial should be reflected in my approach to the costs issues.

[40]      In particular, the seemingly unfounded inflation of the claim prior to the settlement meeting was unreasonable and counter-productive. I accept the chances of the matter settling prior to that conference were high, given that HBS’s solicitors had authority to settle for what was ultimately a higher sum than the eventual judgment amount. No such offer eventuated, but if it had, ordinary Calderbank principles would have applied and HBS would have been entitled to its costs post-offer. I accept that it was Mr Flanaghan’s unreasonable conduct in inflating the claim that in large part precluded such an offer eventuating.

[41]      I accept Mr Riches’ submission that communications made and meetings held ‘without prejudice’ are inadmissible unless there is an express reservation as to costs. Here, the status of the meeting is not clear. The earliest mail before the Court from

Mr Flanaghan’s solicitors refers to setting up a “without prejudice negotiation”. The reply from Mr Parker includes a banner reading “without prejudice save as to costs”. From thereon out the correspondence from both sides refers to a ‘without prejudice meeting’, although it is possible that was intended as shorthand for ‘without prejudice save as to costs’. It may be that the parties were not on the same page as to the status of the settlement discussions.

[42]      Whatever the status of the meeting, I am satisfied that the fact of the inflation of the claim is something I can properly take into consideration. While it appears this was first communicated to HBS at the meeting, it remained Mr Flanaghan’s position for the following week. The inflation itself was not part of settlement discussions, and forms part of the broader background to the history of the litigation. I consider the inflation was unreasonable and counterproductive.

[43]      I do not consider the failure to engage with the $100,000 settlement offer constitutes unreasonable conduct worthy of affecting costs. That figure was lower than the amount ultimately awarded by the Court, and a party is under no general obligation to do what they can to achieve a negotiated settlement. Aggrieved parties are entitled to their ‘day in Court’, and here Mr Flanaghan was in large part vindicated in proceeding to trial. Although any difficulty ought to have been able to be overcome before the fixture, the breakdown in communication regarding the offer appears to have been partly due to Mr Flanaghan changing counsel.

[44]      However, I accept that elements of Mr Flanaghan’s claim significantly lacked merit. The application for a tax indemnity, in particular, added unnecessarily to the costs of proceedings. The insistence on calling its expert witness on the breaches despite consensus and the joint expert report is difficult to understand, and again unnecessarily added to the expense. However, it appears both sides contributed to that unfortunate situation. Either option of a concession or reliance solely on the joint experts’ report would have been preferable to the experts being called. Having regard to their respective position regarding HBS’s professional obligation and the effect and state of the expert evidence, in my view neither party by acceding to the other’s request would have exposed themselves to any heightened litigation risk.

Conclusion

[45]      Weighing all of these factors, and the parties’ relative success and failure at trial, my view is that costs should lie where they fall. Having regard to the outcome of the trial and their respective conduct, I do not consider either party has justified why costs should be awarded in their favour in preference to the other.

Result

[46]Costs are to lie where they fall, including costs on this application.

Solicitors:

Saunders & Co, Christchurch

Parker Cowan Lawyers, Queenstown