Flujo Holdings Pty Ltd v Merisant Company Inc
[2018] NZCA 226
•29 June 2018 at 11 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA548/2017 [2018] NZCA 226 |
| BETWEEN | FLUJO HOLDINGS PTY LIMITED |
| AND | MERISANT COMPANY INCORPORATED |
| Hearing: | 18 April 2018 |
Court: | Cooper, Dobson and Toogood JJ |
Counsel: | D L Marriott for Appellant |
Judgment: | 29 June 2018 at 11 am |
JUDGMENT OF THE COURT
AThe application for an extension of time to appeal is granted.
BThe appeal is dismissed.
CThe appellant must pay the respondents costs for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Dobson J)
Introduction
This is an appeal from two costs decisions. The first awarded a contribution to actual costs incurred by the respondents (Merisant) when the appellant (Flujo) was deemed to have acted unreasonably in discontinuing its proceeding one working day before a five-day substantive fixture.[1]
[1]Flujo Holdings Pty Ltd v Merisant Co [2017] NZHC 1656, [2017] NZAR 1395 [first costs judgment].
Fitzgerald J awarded indemnity costs of $58,035, which her Honour calculated on the basis that sum represented 40 per cent of actual costs incurred by Merisant in the final three weeks of trial preparation, up to the discontinuance on the eve of trial.[2] Fitzgerald J rejected Merisant’s claims for full indemnity for that period, and also rejected claims for indemnity or increased costs for earlier stages in the litigation. Flujo now argues that there were no grounds for any award of indemnity costs and that the quantum awarded was excessive.
[2]For the period of 10 April 2017 to 28 April 2017.
Alongside its argument regarding costs, Merisant had unsuccessfully sought an order to vary the terms of the discontinuance filed by Flujo so as to preclude the prospect of fresh proceedings advancing the same claims. Merisant was also deemed by Fitzgerald J to have substantially failed in its application for indemnity costs for the entire proceedings. Her Honour formed the provisional view that Flujo was entitled to costs on the argument on those issues.
In the second costs decision, the Judge ordered 2B scale costs in favour of Flujo in respect of the costs and discontinuance applications.[3] Her Honour reduced that by 30 per cent to reflect the extent to which Merisant had succeeded in obtaining indemnity costs for the last three weeks of trial preparation.
[3]Flujo Holdings Pty Ltd v Merisant Co [2017] NZHC 2069 [second costs judgment].
The amount is modest, but Flujo also appeals against that 30 per cent reduction on the grounds that it does not reflect the respective merits of the parties’ positions on those arguments and their outcome.
Leave to appeal out of time
Merisant objected to the appeal against the first costs decision being heard on the ground that Flujo had not applied for leave to file the appeal out of time. The first costs judgment was issued on 18 June 2017, and a notice of appeal was filed and served on 25 September 2017. That was substantially outside the 20 working days after delivery of the judgment within which any appeal should have been brought.[4]
[4]Court of Appeal (Civil) Rules 2005, r 29.
Mr Marriott for Flujo disputed that time ran from the date of delivery of the first costs decision because its effect could not adequately be assessed until delivery of the second costs decision issued on 28 August 2017. The present appeal was commenced within 20 working days after that.
The outcome on the first costs decision was not contingent in any way on the outcome of the costs issues determined in Fitzgerald J’s second costs decision. It reflected a complete determination and was, subject to the judgment being sealed, enforceable in the usual way once issued.
At the hearing, the Court indicated its likely rejection of Mr Marriott’s argument for deferring the commencement of time for filing the appeal. He requested a short adjournment to take instructions on making an oral application for leave to extend time for the bringing of the appeal. After the adjournment, Mr Marriott made an oral application on the grounds that, from the appellant’s perspective, the scope of the appeal remained unclear until delivery of the second judgment and that, in any event, Merisant was not prejudiced by the delay.
For Merisant, Mr Elliott QC submitted that the delay in pursuit of the appeal was merely the last in on-going delays that have frustrated Merisant’s attempts to clarify the propriety of its commercial conduct. Such on-going delays have contributed to increases in the costs of defending its position. Mr Elliott conceded that he was ready and able to respond to the issues raised by the appeal, and could not point to any specific prejudice resulting from the delayed filing of the appeal.
The Court determined that the appeal had been filed out of time. In the absence of material prejudice, leave was granted for the extension of time for the period required up to the date on which the appeal was commenced.
History of the proceeding
The parties are competitors in the production of sweetener products conventionally used as a substitute for sugar. In May 2016, Flujo commenced the proceedings against Merisant alleging passing off, breach of the Fair Trading Act 1986 and infringement of a registered trademark in the allegedly confusingly similar get-up of sweetener products being marketed in New Zealand.
In August 2016, an application for an interim injunction to restrain marketing of Merisant’s product was dismissed by Courtney J.[5] Thereafter, the substantive claims were prepared for trial with something of a pattern of Merisant complaining of inadequacies and delays in Flujo’s discovery and the service of briefs of evidence.
[5]Flujo Holdings Pty Ltd v Merisant Co [2016] NZHC 1779.
A five-day substantive hearing was scheduled for 1 May 2017. On 26 April 2017, Mr Marriott and his then instructing solicitor made application for leave to withdraw respectively as counsel and solicitor for Flujo. The ground for the application was non-payment of fees, in breach of the contract of retainer. On 27 April 2017, Wylie J granted the application for counsel and solicitors to withdraw.[6] The minute recorded the Judge’s warning that any application for an adjournment of the trial date might not be granted.
[6]Flujo Holdings Pty Ltd v Merisant Co HC Auckland CIV-2016-404-1019, 27 April 2017.
The following day, 28 April 2017, Wylie J heard an application for an adjournment of the trial advanced by Flujo’s Australian solicitor, Mr Franklin. His Honour declined the application for an adjournment.[7] That minute recorded advice from Mr Franklin that if the adjournment was not granted, Flujo might discontinue the proceedings and file afresh. Wylie J’s comment on that was “[t]hat course would likely have costs consequences but it is a matter for the plaintiff.”[8]
[7]Flujo Holdings Pty Ltd v Merisant Co HC Auckland CIV-2016-404-1019, 28 April 2017.
[8]At [15].
Shortly before 5.00 pm on that Friday afternoon, effectively the eve of trial, Flujo filed a notice of discontinuance. Merisant’s response was to file an application to vary the conventional terms of the discontinuance that Flujo had filed so as to preclude the commencement of other proceedings advancing the same or substantially similar claims, and to seek indemnity or increased costs for all its participation in the proceedings.
First costs judgment
Fitzgerald J reviewed the parties’ competing positions on:
(a) whether the relative weakness of Flujo’s claims ought to have been apparent from the terms in which Courtney J dismissed the interim injunction application;
(b) the extent of Flujo’s delays and alleged intransigence in progressing the case towards trial;
(c) whether the Court could form a view on Merisant’s claim that Flujo had been unreasonable in rejecting a settlement offer; and
(d) the relative unreasonableness of Flujo’s conduct in the period immediately before trial, resulting in wasted costs being incurred for Merisant where it anticipated it would have to repeat a substantial amount of the final trial preparation if and when Flujo obtained a fixture for subsequent proceedings on the same or substantially similar claims.
Fitzgerald J held that she was not in a position to assess the merits of the claims to an extent that could be relied on in making a finding on the reasonableness of Flujo persisting after its unsuccessful interlocutory injunction application, or on the reasonableness of rejecting Merisant’s settlement offer. The consequences of Flujo’s delays in compliance with timetabling had been separately addressed in a costs judgment in April 2017.[9]
[9]Flujo Holdings Pty Ltd v Merisant Co [2017] NZHC 811.
Her Honour declined to grant the application for indemnity costs for the whole proceedings.[10] However, the Judge found that Flujo’s conduct in the immediate pre‑trial period was very unreasonable.[11] The predicament in which Flujo found itself was entirely of its own making, and a significant portion of Merisant’s costs in preparing for trial in the immediate pre-trial period were likely to be wasted.[12]
[10]First costs judgment, above n 1, at [84].
[11]At [85].
[12]At [85].
The Judge acknowledged the general rule that indemnity costs are exceptional and will only be awarded where a party has behaved badly, very unreasonably or is guilty of flagrant misconduct.[13] The Judge found that Flujo’s conduct in the immediate pre-trial period justified an order that would require a contribution to Merisant’s actual costs.[14] The affidavit evidence detailed costs of some $145,000 excluding GST and disbursements in the period between 10 April 2017 and 28 April 2017. Recognising that some of the pre-trial steps may be able to be utilised in fresh proceedings, the Judge considered that a 40 per cent contribution to these immediate pre-trial costs would be appropriate.[15] To avoid any doubling up, her Honour directed that this award would replace what Merisant might otherwise claim on a scale basis for steps 30, 32 and 33 in sch 3 to the High Court Rules 2016.[16] Costs on the remaining steps in the proceedings would be calculated on a 2B basis.
[13]At [81]; citing Telstra New Zealand Holdings Ltd v Commissioner of Inland Revenue (2010) 21 PRNZ 1 (HC) at 65; and Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] 3 NZLR 400 at [27]–[29].
[14]At [85].
[15]At [87].
[16]Those steps are for preparation of briefs or affidavits, preparation of lists of issues, authorities and common bundle, and preparation for hearing.
The Judge rejected the alternative of Merisant’s claim for increased costs across the whole proceeding. Recognising that only costs associated with the immediate pre-hearing period justified assessment on other than a scale basis, her Honour did not address the prospect of increased costs for that period because of her ruling on entitlement to indemnity costs at a portion of the actual costs incurred.
Second costs judgment
Fitzgerald J separately considered competing costs applications on the argument of Merisant’s applications to vary the terms of the discontinuance, and for indemnity or increased costs. The Judge dealt with those applications on the papers and issued her second costs judgment on 28 August 2017. She recognised that Flujo had been largely successful in its defence of the applications and that Merisant had only clarified its fall‑back position on seeking increased or indemnity costs for the discrete pre-trial periods during oral submissions.[17]
[17]Second costs judgment, above n 3, at [18].
The Judge assessed that the appropriate course was to award scale costs to Flujo, but to reduce their extent by 30 per cent to reflect the not insignificant award of indemnity costs Merisant had obtained.[18]
Grounds of appeal
[18]At [20].
Mr Marriott accepted that the costs decisions constituted the exercise of a discretion so that Flujo had to discharge the onus of showing that the Judge was plainly wrong, had acted on a wrong principle, took into account irrelevant matters or failed to take into account relevant ones. He sought to discharge that onus in the challenge to the first costs judgment by arguing that determining the quantum of costs by reference to the extent of costs actually incurred by Merisant breached the overriding principle that, so far as possible, costs determinations should be predictable and expeditious. Further, he argued that indemnity costs were only warranted in truly exceptional circumstances or where a party had behaved exceptionally badly, but neither finding could be made in respect of Flujo’s conduct of the proceeding.
Mr Marriott also argued that the 40 per cent contribution to actual costs was not reasonable, and that the extent of those costs was excessive for the tasks involved. They were also excessive by reference to the determination of reasonable time for relevant steps under the High Court Rules when calculated on a 2B basis that was otherwise appropriate for the proceeding.
For Merisant, Mr Elliott disputed each of these grounds, made strong criticisms of the unreasonableness of Flujo’s conduct throughout the proceedings, but in particular in the lead up to discontinuance, and justified quantum by reference to detailed fee notes and the scale of the tasks reasonably undertaken.
Flujo’s challenge to the 30 per cent reduction in the costs ordered in its favour in the second costs judgment depended on the success of its arguments in challenging the first: if Merisant was not entitled to costs on an indemnity basis for the immediate pre-trial preparation, then it would follow that the Judge had erred in reducing Flujo’s costs entitlement by 30 per cent for opposing that application.
Discussion
The last of seven overriding principles applying to the determination of costs is that, as far as possible, the determination of costs should be predictable and expeditious.[19] After provisions for scale costs in rr 14.3–14.5, the prospect of increased costs and indemnity costs is provided for in r 14.6. It begins in the following terms:
14.6 Increased costs and indemnity costs
(1) Despite rules 14.2 to 14.5, the court may make an order—
(a) increasing costs otherwise payable under those rules (increased costs); or
(b) that the costs payable are the actual costs, disbursements, and witness expenses reasonably incurred by a party (indemnity costs).
(2) The court may make the order at any stage of a proceeding and in relation to any step in it.
…
[19]High Court Rules, r 14.2(1)(g).
The rule then provides for the circumstances in which the Court may order parties to proceedings to pay increased costs and, on separate criteria, indemnity costs. Generally, the criteria for ordering increased costs are less onerous to make out than those for indemnity costs. Criticisms of the party liable to costs are therefore likely to escalate in their relative seriousness from the circumstances warranting increased costs to those that warrant indemnity costs. However, that is not necessarily the case. In this appeal it is appropriate to focus on whether there was any error in the Judge finding that the criteria for indemnity costs were made out first. The relevant part of r 14.6 is expressed as follows:
(4) The court may order a party to pay indemnity costs if—
(a) the party has acted vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing, or defending a proceeding or a step in a proceeding; or
(b) the party has ignored or disobeyed an order or direction of the court or breached an undertaking given to the court or another party; or
(c) costs are payable from a fund, the party claiming costs is a necessary party to the proceeding affecting the fund, and the party claiming costs has acted reasonably in the proceeding; or
(d) the person in whose favour the order of costs is made was not a party to the proceeding and has acted reasonably in relation to it; or
(e) the party claiming costs is entitled to indemnity costs under a contract or deed; or
(f) some other reason exists which justifies the court making an order for indemnity costs despite the principle that the determination of costs should be predictable and expeditious.
Having distinguished the character of Flujo’s conduct throughout all earlier stages of the proceeding, Fitzgerald J found that Flujo’s conduct leading to the proceeding being discontinued was very unreasonable. That view accorded with the view adopted by Wylie J in refusing to grant an adjournment of the fixture.
Mr Marriott submitted that there must be conduct that is truly exceptional before the general costs principles (including the principle that the determination of costs should be predictable and expeditious) can be displaced.
Mr Marriott relied on the Supreme Court’s observation in Prebble v Awatere Huata (No 2):[20]
[6] In New Zealand, costs have not been awarded to indemnify successful litigants for their actual solicitor and client costs, except in rare cases generally entailing breach of confidence or flagrant misconduct. Except in such cases, in both the Court of Appeal and the High Court orders for party and party costs have been limited to a reasonable contribution to the costs of the successful party. …
[20]Prebble v Awatere Huata (No 2) [2005] NZSC 18, [2005] 2 NZLR 467 (footnotes omitted).
Mr Marriott also relied on the observation of this Court in Bradbury v Westpac Banking Corp, reflecting the Supreme Court’s stance:[21]
Indemnity costs, which depart from the predictability of the Rules Committee’s regime, are exceptional and require exceptionally bad behaviour. That is why to justify an order for such costs the misconduct must be “flagrant”.
[21]Bradbury v Westpac Banking Corp, above n 13, at [28].
Where a plaintiff is entirely responsible for a last minute discontinuance in a proceeding of this type because of an unresolved dispute with its legal advisers over payment of their fees, then the conduct leading to discontinuance is indeed very unreasonable. This was relatively complex commercial litigation between trade competitors. Allegations of passing off generally carry with them implied criticism of the commercial morality of the defendant which justifies a strenuous response. The categorisation of Flujo’s conduct as very unreasonable is, in these circumstances, a reasonable synonym for the forms of conduct that are listed in r 14.6(4)(a). A generic summary of conduct that is vexatious, frivolous, improper or unnecessary is that it would be very unreasonable.
Alternatively, those circumstances constitute another reason justifying an order for indemnity costs under r 14.6(4)(f).
Mr Marriott’s criticism that the Judge ranked Flujo’s conduct as much worse than it really was loses its impact when the focus is confined to the last fortnight before trial. The Judge was entitled to treat that final part of the pre-trial preparation separately from all the steps that had gone before. Flujo’s conduct in that period of little more than two weeks did constitute flagrant misconduct when the disruption was solely of its own making, causing Merisant to be left ostensibly fully prepared but having thereafter to regroup for the anticipated further set of proceedings.
Put another way, Flujo was misguided if it considered that the general principle that cost outcomes be predictable and expeditious would limit the adverse consequences of its extraordinary pre-trial behaviour to paying scale costs to Merisant, when it must have known the likely extent to which that would leave Merisant out of pocket.
Mr Marriott submitted the Judge was wrong to take into account, when evaluating any misconduct by Flujo in the last fortnight before its discontinuance, the consequence that it resulted in Merisant incurring allegedly wasted costs. He argued that a contribution to such costs in accordance with scale was all that Merisant could expect, and that the (uncertain) prospect that costs of final trial preparation would be incurred again could be addressed on its merits when that in fact had happened, depending on the eventual outcome of the proceeding. Alternatively, if at all, this concern ought to have been addressed by considering increased costs on a step‑by‑step basis.
We are satisfied that the Judge attributed no more than appropriate relevance to the nature of the intensive work Merisant reasonably undertook in the final fortnight before trial. It is a stage at which, in a proceeding of this type, a responsible defendant would commit substantial resources to trial preparation, the utility of which would be much reduced if the trial did not proceed forthwith.
Late adjournments are often granted with the applying party having to make a contribution to the wasted costs incurred by the opposing party. It is a circumstance in which judges routinely nominate an amount without relating it to scale costs for pre-hearing steps. Where such costs are wasted in circumstances that are entirely attributable to the plaintiff’s breach of retainer with its legal advisers, those circumstances go to the extent of unreasonableness of Flujo allowing that predicament to develop.
Mr Marriott also criticised the Judge’s decision to fix the indemnity at 40 per cent of the costs that had been incurred. In essence, if the flagrancy of the misconduct by Flujo was not sufficient to justify indemnity for all, or substantially all, of those costs, then arguably the case was not an appropriate one for treatment on an indemnity costs basis. Implicitly, his criticism was that invoking the indemnity costs rule when the indemnity was for less than half of the costs that had been incurred lowered the barrier for invoking the rule below the high standard that should be maintained.
However, Mr Marriott’s submission reverses the order in which the issues need to be addressed. The first question is whether a party has been responsible for conduct that merits an award of indemnity costs, that is, does r 14.6(4) apply? We have already recorded our view that this was such a case. The second question is what the level of the indemnity costs should be. In that respect while it is customary to refer to the solicitor and client costs actually incurred, there has always been a discretion to reduce that amount. The common situation is where for whatever reason the court considers the costs are excessive. The Judge did not express the view that was the case here, but it may be inferred that she thought the full amount should not be recoverable for various reasons. It may also be inferred she did not consider that increased costs within the kind of limits contemplated by the cases for a percentage increase on scale would be sufficient to compensate the respondent for the appellant’s conduct.
As was said in Bradbury v Westpac Banking Corporation, indemnity costs are calculated not from the costs rules but from a “reasonable allocation of actual costs”, based on the appropriate time taken, the significance and complexity of the work, and the appropriate hourly rate reasonably applicable.[22] The fact that indemnity costs end up being calculated to be less than full indemnity, even significantly so, does not imply that the bar for the award of indemnity costs has been lowered; that question is answered by asking whether r 14.6(4) applies. We see no reason why other factors, such as the consideration that the costs may not have been entirely wasted if the claim eventually proceeds to a trial should not legitimately be part of the calculation. Taking that into account was an approach that favoured the appellant.
[22]Bradbury v Westpac Banking Corp (2008) 18 PRNZ 859 (HC) at [209].
Mr Marriott’s written submissions stated that justification did not exist for either indemnity or increased costs in this case. In oral submissions, he qualified that stance as an aspect of the criticism of the quantum awarded. He submitted that even if an award of increased costs for this aspect of the proceeding was warranted, then the quantum granted was excessive.
Mr Marriott urged that the approach to increased costs described in this Court’s judgment in Holdfast NZ Ltd v Selleys Pty Ltd ought equally to apply here.[23] That judgment suggested an upper limit on the extent of increased costs at about 50 per cent above scale. He argued that this approach underscored the unreasonableness of 40 per cent of actual costs, which amounted to some four times scale.
[23]Holdfast NZ Ltd v Selleys Pty Ltd (2005) 17 PRNZ 897 (CA).
Merisant’s costs application, in the alternative to seeking indemnity costs, was to seek increased costs for the whole proceeding. Once the Judge had rejected the more ambitious claim in respect of indemnity costs for the whole proceeding, it was sensible and consistent with her reasons for doing so that the alternative claim for increased costs for the whole proceeding also be rejected. As the Judge found that an indemnity costs approach was justified for the steps in the last fortnight pre-trial; there was no reason for the Judge to consider the alternative of increased costs for that short period as some form of cross-check to test the reasonableness of the outcome arrived at on an indemnity costs basis. Rule 14.6(2) provides the Court with the power to grant indemnity or increased costs discretely for one or more steps in a proceeding.
In any event, the issues on appeal in Holdfast were very different to those arising in the present appeal. In that case, the High Court had awarded increased costs of nearly four times scale, in reliance on findings of the perceived unreasonableness of the plaintiff’s rejection of a settlement offer and criticisms of the belated attempt to adjourn the hearing in order to add a further defendant. This Court found both of those criticisms to be unfounded and reconstructed a fresh costs analysis partly in response to the extent by which the High Court order for increased costs had exceeded scale. No such considerations arise here.
There were considerations in this case that enabled the approach adopted to apply on a principled basis. Despite an indemnification approach being adopted, the Judge was concerned to balance that against the prospect, first, that all costs incurred might not have been wasted and, secondly, Flujo’s criticism that Merisant’s costs were excessive. It is reasonably implicit that the percentage reduction also takes account of any concern that the level of costs actually incurred might have been more than was reasonable for a case of this nature and complexity. We see no error in the circumstances confronting the Judge in this case, in adopting indemnification for 40 per cent of the costs incurred in the three week period leading up to the fixture date. We are not to be taken as endorsing the approach as one that is generally available.
Once Flujo’s appeal against the first judgment is unsuccessful, the grounds for challenging the 30 per cent reduction on scale awarded in its favour in the second costs judgment largely fall away. Having upheld the first costs judgment, there can be no criticism of the Judge’s approach to the second award. It reflected Flujo’s qualified success in opposing Merisant’s applications which was then appropriately discounted to reflect the extent to which their opposition was not successful.
Result
The application for an extension of time to appeal is granted.
The appeal is dismissed.
The appellant must pay the respondents costs for a standard appeal on a band A basis and usual disbursements.
Solicitors:
Hudson Gavin Martin, Auckland for Appellant
Kensington Swan, Auckland for Respondents
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