FM Custodians Ltd v Pati
[2012] NZHC 1902
•31 July 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2012-404-000802 [2012] NZHC 1902
UNDER The Judicature Act 1908
IN THE MATTER OF Application for Summary Judgment
BETWEEN FM CUSTODIANS LIMITED Plaintiff
ANDPENE PATI AND RICARDO OSCAR MARQUES AS TRUSTEES OF THE ARGEN FAMILY TRUST
Defendants
Hearing: 4 July 2012, and by memoranda 5, 11 and 12 July 2012
Counsel: H P Holland for plaintiff
D R Bigio for defendants
Judgment: 31 July 2012
JUDGMENT OF ASSOCIATE JUDGE ABBOTT
This judgment was delivered by me on 31 July 2012 at 5pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors:
S C Cowan, Bramwell Grossman, PO Box 500, Hastings
J Tam, Yang Lawyers, PO Box 99865, Newmarket, Auckland
Counsel:
H P Holland, Barrister, PO Box 128 224, Remuera
D R Bigio, PO Box 4338, Auckland
FM CUSTODIANS LIMITED V PENE PATI AND RICARDO OSCAR MARQUES AS TRUSTEES OF THE ARGEN FAMILY TRUST HC AK CIV 2012-404-000802 [31 July 2012]
[1] This decision concerns a dispute over costs following withdrawal of an application for summary judgment and a decision by the plaintiff to discontinue the proceeding because the loan that underlies the claim has been repaid.
Background
[2] The plaintiff, FM Custodians Limited, sued the defendants as guarantors of obligations under a loan agreement between it and Culverden Retirement Village Limited (the borrower).
[3] The defendants are the trustees of the Argen Family Trust (the trust). The borrower and the trust are associated entities (in a general sense) through family relationships and dealings with assets. The defendants are the registered proprietors of several properties within the Culverdon Retirement Village that were mortgaged as security for the loan. They gave a guarantee of the borrower’s obligations.
[4] The borrower defaulted under the agreement. It has since been placed into liquidation. The plaintiff took steps to recover the loan by exercising its power of sale as mortgagee of the various security properties and by suing the defendants. Towards this end, in November 2011 it issued the requisite notices under the Property Law Act 2007 and made demand on the defendants.
[5] The plaintiff commenced this proceeding on 17 February 2012 claiming
$2,715,294.04 as the sum due under the loan agreement as at 10 February 2012.
[6] In addition, following expiry of the time for remedying the defects in the Property Law Act notices, the plaintiff (together with mortgagees of the other properties making up the Culverden Retirement Village) proceeded to market the complex for sale as a whole.
[7] After issuing this proceeding, the plaintiff and the other mortgagees received and accepted an offer for the security properties. The sale settled on 21 June 2012. The proceeds of sale were sufficient to repay the plaintiff’s loan (as well as the loans
from the other secured lenders). Promptly after the sale of the security properties settled, the plaintiff informed the defendants that it was withdrawing its application and discontinuing the proceeding.
The claim for costs
[8] The defendants have applied for costs of $10,447.80 in terms of scale 2B in Schedule 3 to the High Court Rules, relying on the presumption in r 15.23 that costs should be paid by the discontinuing party. The plaintiff contends that the presumption is displaced in the circumstances of the case, and that it is just and reasonable that there be no order in the defendants’ favour. In the alternative the plaintiff challenges the quantum of costs being sought.
Legal principles
[9] Rule 15.23 of the High Court Rules (formerly r 476C) creates a presumption that a plaintiff who discontinues will pay costs to the defendant:
15.23 Costs
Unless the defendant otherwise agrees or the court otherwise orders, a plaintiff who discontinues a proceeding against a defendant must pay costs to the defendant of and incidental to the proceeding up to and including the discontinuance.
[10] The presumption may be displaced if the Court finds there are circumstances which make it just and equitable that it should not apply.1
[11] The Court is not limited in the factors that can be taken into account when considering whether the presumption is displaced, but the following are matters which are taken into consideration:
(a) As the general rule the Court will not consider the merits of the respective cases (unless they are so obvious that they should influence
the costs issue).2
1 North Shore City Council v Local Government Commission (1995) 9 PRNZ 182 (HC) at 188; Kroma
Colour Prints Ltd v Tridonicatoato NZ Ltd [2008] NZCA 150, (2008) 18 PRNZ 973 at [12].
(b)The Court will consider the reasonableness of the stance of both parties in the proceeding (whether it was reasonable for the plaintiff to bring and continue the proceeding, and for the defendant to oppose and continue to oppose it, up to the point of discontinuance).3
(c) Conduct prior to the commencement of the proceeding may be relevant (for example, if any conduct by a defendant has precipitated the litigation), as may be the reason for discontinuing (for example, where a change of circumstances has made the proceedings unnecessary).4
[12] The Court’s general discretion in relation to costs5 can also override the general principles in relation to discontinuance.6
Contentions in the present case
[13] Counsel for the plaintiff advanced two factors which she argued made it just and equitable not to apply the presumption:
(a) The plaintiff was enforcing a contractual right and it was reasonable both to commence the proceeding and to continue with it until its debt was cleared by receipt of the funds from the sale of the security properties; and
(b)The plaintiff had a contractual entitlement to indemnity for its costs, and any award in favour of the defendants would cut across that
contractual entitlement.
2 North Shore City Council, above n 1, at 186; Kroma Colour Prints Ltd op cit.
3 North Shore City Council, above n 1, at 187; Kroma Colour Prints Ltd op cit.
4 Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194, quoted in
North Shore City Council, above n 1, at 187. See also McGechan on Procedure (looseleaf ed, Brookers) at [HR15.23.01], cited in Vector Gas Ltd v Todd Petroleum Mining Co Ltd HC Wellington CIV-2004-485-1753, 7 December 2010.
5 High Court Rule 14.1.
6 Oggi Advertising Ltd v McKenzie (1998) 12 PRNZ 535 (HC) at 536; Kroma Colour Prints Ltd op cit.
[14] In support of the first point, counsel submitted that it was entirely reasonable for the plaintiff to pursue recovery from the guarantors at the same time as exercising rights against the security properties. She said that at the time the proceeding was issued the plaintiff anticipated a significant shortfall, and it was only after tenders were received that the plaintiff appreciated that it would not need to call on the guarantors (she referred to a valuation of about $2 million having been obtained for the securities that were available to the plaintiff).
[15] She submitted further that it was also reasonable to defer withdrawal of the application until settlement of the sale as there was a possibility, until funds were received, that the defendants would attempt to delay or prevent the sale. In support of this further submission, counsel relied on a report from the real estate agent handling the tender process that Mr Anderson (director of the borrower) had obstructed the sales process.
[16] Counsel for the plaintiff also submitted that, if merits were to be considered,
they were in her client’s favour.
[17] Counsel for the defendants argued that none of the matters raised for the plaintiff were sufficient to displace the presumption. His primary submission was that it was not reasonable for the plaintiff to have issued this proceeding against collateral guarantors before completing the sale of the security properties and establishing whether there would be a shortfall. He took issue with the submission that the highest valuation that the plaintiff could obtain was around $2 million on the grounds that the plaintiff had provided no evidence of this. Irrespective of that point, he submitted that there was no reason to pursue the guarantors urgently, and that a strategic decision to pursue both sets of remedies was not a sufficient basis for displacing the presumption.
[18] Counsel submitted further that even if the plaintiff could be said to have acted reasonably in bringing and discontinuing the proceeding, that fact alone was not enough, and the plaintiff still needed to show that it would not be just or equitable to
make a costs award in the defendants’ favour.7 He argued that it had been reasonable
7 Relying on Vector Gas Ltd, above n 4, at [18].
for the defendants to oppose the application (to protect the remaining assets of the trust), and that to the extent that there was any ground for concern about obstruction of the sale process (which was not accepted) that was not a matter affecting the defendants: such evidence as there was on the point was limited to the actions of Mr Anderson. He submitted that the trustees should not have to bear the costs of defending a proceeding which had not been necessary.
[19] In relation to the submission on the plaintiff’s contractual right to indemnity, counsel for the defendants argued that the Court had a discretion over the award of costs, and the fact of a contractual entitlement “begged the question” as to how costs should be dealt with on discontinuance.
Discussion
[20] Although counsel for the plaintiff submitted that there was no merit to the grounds of opposition advanced by the defendants, I do not regard this as a case where the merits are so obviously in favour of one party or another that they should be treated as a determining factor when considering costs.
[21] Several, if not all, of the grounds of opposition derived from an allegation that the plaintiff had reneged on a promise in relation to restructuring the finance of Culverden Retirement Village so as to cure underlying problems arising out of the terms of the resource consent for the complex and registration for use as a retirement village. One of the specific grounds for opposition was that there was a dispute of fact as to whether the plaintiff had made the alleged promise or a representation from which it would be unconscionable to resile.
[22] The plaintiff contended that there was nothing in these points which could affect the guarantees (and there is some merit in that contention as it is difficult to see how the circumstances could amount to pressure on the defendants to give the guarantees). Nevertheless, if the defendants had succeeded in persuading the Court that the dispute over the “promise” could only be determined after cross-examination of the relevant parties (which was an arguable proposition), that would open the door
for the defendants’ other arguments at trial. However, these arguments are now
moot, and the law is clear that the Court will not speculate on possible outcomes. [23] This takes me to the parties’ respective stances in the proceeding:
(a) Speaking generally, the plaintiff was entitled to pursue the defendants (as guarantors) at the same time as its other remedies. I also accept that it was not unreasonable to wait until the sale settled before making its decision to discontinue. Although Mr Anderson’s resistance does not necessarily equate with resistance by the defendants, Mr Anderson appears to have been an, if not the, influential figure in the dispute. If he elected to challenge the sale, settlement might well have been deferred or prevented. Additionally, there is evidence before the Court that solicitors acting for both Mr Anderson and the defendants on two occasions indicated the possibility of a challenge to the sale process (contending that the sales had been improperly advertised).
(b)Conversely, however, the defendants had a duty to protect the assets of the trust other than those being sold as part of the security properties, and advanced arguments which, if they were successful, would achieve that purpose (notwithstanding the reservations that I have as to whether those arguments would be accepted).
[24] In summary, both parties prima facie had a proper basis for commencing and opposing this proceeding respectively. I have come to this view even though I accept counsel for the defendants’ submission that there is no direct evidence to support counsel for the plaintiff’s submission that the plaintiff anticipated a significant shortfall following sale of the security properties, particularly as at the time of issuing the proceeding. Although the defendants produced in their opposition a valuation undertaken in May 2010, which gives forced sale values that support the plaintiff’s contention, that valuation was not given to the plaintiff until after the proceeding was commenced. However, it is a reasonable inference that the plaintiff had such advice (of a potential shortfall) as it is not credible, from a
commercial perspective, that it would have incurred the cost of issuing the proceeding if the mortgagee sale process was certain to realise enough to repay its loan in full.
[25] The central question, however, is not whether the plaintiff was entitled to issue the proceeding, but whether it was reasonable for it to do so (for the purpose of determining costs).
[26] There is no evidence of any need to commence the proceeding against the defendants before the outcome of the mortgagee sale process was known. The mortgagee sale process was underway at the time the proceeding was issued, and was largely completed by 9 May 2012 when the successful tender was accepted. The plaintiff could have deferred issue of its proceeding against the defendants until that point, but elected to run the two processes in tandem. As I have already said, it was legally entitled to do so, but that is not to say that cost consequences follow automatically from that entitlement. The plaintiff must also show that it was reasonable to issue the proceeding when it did if it wants to avoid cost consequences on discontinuance.
[27] I do not accept the argument of counsel for the plaintiff that the plaintiff’s contractual entitlement to indemnity should override r 15.23 and the Court’s discretion on costs. The plaintiff has no doubt exercised its entitlement by deducting costs from the proceeds of sale. The Court’s discretion is a separate matter. The fallacy in this argument can be seen if one looks to the incidence of costs if the matter went to trial and the plaintiff failed on the substantive claim. The defendant would have to be entitled to their costs in that event.
[28] Counsel for the plaintiff argued that the Court should not apply the presumption because it had not yet discontinued the proceeding. There is nothing in this argument. Counsel advised in a memorandum filed ahead of the hearing and confirmed orally in the hearing that the plaintiff intended to discontinue. The application was withdrawn. There is no suggestion that the plaintiff would seek to pursue the proceeding if r 15.23 applied, nor as to what it might then seek. I consider that in the circumstances, the Court can proceed to determine the costs issue
as if the plaintiff has discontinued. However, if I am wrong in that view, I consider that I can take the same principle into account (again in the circumstances of this case) under the Court’s general jurisdiction under r 14.1.
[29] Ultimately, the Court has to determine what is fair and just in the circumstances. The plaintiff elected to commence this proceeding before knowing whether there was a shortfall to recover from the defendants (as guarantors, not borrower), and when a process was underway which would establish the extent of the shortfall within a relatively short period. This is not a situation where the plaintiff can be considered the successful party. That might have been the case as against the borrower, but it is not so against the guarantors. In the particular, and perhaps unique, circumstances of this case, I do not consider the presumption under r
15.23 to be displaced.
Quantum
[30] Counsel for the defendants presented at the hearing a schedule of costs calculated on a scale 2B basis. Neither counsel, at that time, had addressed whether the recent amendment to the scale (which came into force on 14 June 2012) changed these calculations. They were given the opportunity to consider the point and have filed memoranda with further submissions.
[31] The High Court Rules provide for scale costs in Schedule 2 (daily recovery rates according to category of proceeding) and Schedule 3 (time allocations for steps taken). Schedules 2 and 3 were amended by the High Court Amendment Rules 2012 which, as mentioned, came into force on 14 June 2012. There are no transitional provisions for the schedules in relation to costs of existing proceedings. In this respect the latest rules differ from amendments to the schedules over the past ten years or so (including the substantial revision of the rules generally in 2008):
(a) The High Court Amendment Rules (No.2) 2000 (which commenced on 1 January 2001) substituted a new Schedule 3, and provided that the old Schedule was to apply to steps taken up to 1 January 2001 and
for the new schedule to apply from that date.8 The transitional provision also gave the Court a discretion to make an adjustment if a strict application of the rule would produce an unjust result.9
(b)The High Court Amendment Rules (No.2) 2003 (which commenced on 1 January 2004) substituted a new Schedule 2. The rules contained a transitional provision that costs for steps taken before the new rules came into force were to be determined in accordance with the
previous Schedule 2.10
(c) The High Court Amendment Rules 2006 (which commenced on 1
June 2006) substituted a new Schedule 2 and made significant amendments to Schedule 3. The rules contained essentially the same transitional provision as the 2000 and 2003 rules (in other words, costs for steps taken up to the date of commencement were to be
determined under the previous schedules).11
(d)When the High Court Rules were substantially revised in 2008, the Judicature (High Court Rules) Amendment Act 2008 provided explicitly that any proceeding that had been commenced before the new rules came into force was to continue and be completed under the new rules.12
(e) The High Court Amendment Rules 2010 (which commenced on 24
May 2010) substituted a new Schedule 2. The rules contained the same transitional provision as the 2000, 2003 and 2006 rules (that is, costs in proceedings commenced after the coming into force of the new rules were to be determined in accordance with the new
Schedule; in the case of proceedings that had already been
8 High Court Amendment Rules (No.2) 2000, r 5.
9 Rule 5(2).
10 High Court Amendment Rules (No.2) 2003, r 4.
11 High Court Amendment Rules 2006, r 24.12 Judicature (High Court Rules) Amendment Act 2008, s 9.
commenced, the cost of steps taken up to the date that the rules came into force were to be determined under the previous Schedule).13
[32] The issue for the present case is what interpretation to place on the absence of a transitional provision in the High Court Amendment Rules 2012.
[33] In general enacted legislation does not have retrospective effect.14 Although the High Court Rules are an enactment (for the purposes of the Interpretation Act
1999),15 to a large extent the High Court Rules are sui generis.
[34] The history of changes to the schedules, and practical considerations, suggest that the absence of a transitional provision may have been an oversight. In Securities Commission v Midavia Rail Investments BVBA, the Court took a purposive approach to interpretation to justify the insertion of words to correct an obvious drafting
error:16
[55] Rule 446L as drafted makes perfect sense in the case of a plaintiff who is keen to have his or her proceeding on a Commercial List but who cannot achieve that as of right under R 446C because “the proper office of the Court” under R 106 is a non-Commercial List registry. The plaintiff’s proceeding comes within R 446L because he or she “may not file” in Auckland; if he could, he or she would. The rule is less felicitously drafted when it comes to defendants. It is clear, in our view, that the drafter of the rule has overlooked that, in some circumstances, the plaintiff has a discretion under R 106 as to the registry in which the proceeding is brought. From a defendant’s perspective, subcl (1) must be interpreted as applying to an eligible proceeding which, by virtue of the operation of R 106, may not be or has not been filed in Auckland. There is no conceivable reason why the defendant to an eligible proceeding filed out of Auckland should not be able to avail himself or herself of the right to apply for Commercial List entry under R 446L. This is a classic case where a Court is justified in inserting words to correct an obvious drafting error (Inco Europe Ltd v First Choice Distribution (a firm) [2000] 1 WLR 586 at p 592). That is mandated by the purposive approach to interpretation (Interpretation Act, s 5(1)).
13 High Court Amendment Rules 2010, r 5.
14 Interpretation Act 1999, s 7; see also Todd Pohokura Ltd v Shell Exploration NZ Ltd (2008) 18
PRNZ 1026 (HC) at [84]-[89] as to the complicated meaning of “retrospective effect” and occasional distinction between procedural and substantive rights.
15 Interpretation Act 1999, s 29.
16 Securities Commission v Midavia Rail Investments BVBA [2005] 3 NZLR 433 at [55].
[35] It is equally clear, however, that this approach is only available where it is clear from the intent and purpose of the legislation that something is clearly missing or erroneously omitted.17
[36] The High Court Rules are issued under the authority of the Rules Committee, constituted pursuant to s 51C(1) of the Judicature Act 1908 and authorised to make rules regulating the practice and procedure of the Court. It is the body primarily responsible for the process of drafting and consultation in respect of amendments to the rules. Its consultation papers and minutes of meetings are available as a matter of public record. Consultation on the 2012 amendment to Schedule 2 took place in
July 2012.18 The 2012 amendments were discussed in meetings of the Rules
Committee in October 2011, December 2011 and February 2012, before being adopted.19 There was no discussion of transitional provisions in those meetings.
[37] The absence of some transitional provision can be viewed in two ways. First, it can indicate a deliberate change. Secondly, it can indicate an error.
[38] In the present case there is no conceivable reason to alter the pattern of amendment over the preceding 10 years. It made good sense for parties to be awarded costs on the basis of entitlements in place at the time that the work for which costs are sought was undertaken. The change in the schedule was promulgated in the Rules Committee’s consultation paper. If the Rules Committee had intended to change a pattern that had been followed for a period of years (and which appeared to have a sound practical rationale), one would have expected it to
have been the subject of discussion in meetings of the Rules Committee considering
17 JF Burrows and RI Carter Statute Law in New Zealand (4th ed, LexisNexis, Wellington, 2009) at
305-314; Gibbs v Crest Commercial Cleaning (2005) 7 NZELC 97,891 (EmpC) ; R v Secretary of
State for Home Department [2006] EWCA Civ 532.
18 The Rules Committee Proposals for Reform of Schedule 3 High Court Rules (Time Allocations) and
Review of Schedule 2 High Court Rules & Schedule 2 District Court Rules (Daily Recovery Rates)
(27 July 2011).
19 The Rules Committee “Minutes of Meeting held on 3 October 2011” (6 October 2011) Courts of New Zealand October-2011-C-71-of-2011.pdf; The Rules Committee “Minutes of Meeting held on 5 December
2011” (9 December 2011) Courts of New Zealand
< The Rules Committee “Minutes of Meeting held on 13 February 2012” (14
February 2012) Courts of New Zealand< C-10-of-2012.pdf>.
the proposed changes. The absence of any such discussion, coupled with the pattern of transitional provisions in earlier amendments, suggest that the absence of any transitional provision in the 2012 amendments was a matter of oversight. There is no obvious rationale for retrospective application of the new schedules (particularly daily rates, but also time allowances) to steps that have been completed before the introduction of the new schedules. This is particularly so where those steps could have been completed sometime before the 2012 amendments came into force.
[39] In my view the new schedules should be interpreted by adding words to the effect that, in the case of proceedings commenced before the coming into force of the rules (and hence schedules), the new schedules are only to apply, to steps taken after that date, namely 14 June 2012.
[40] I turn now to apply this interpretation to the facts of this case.
[41] Apart from the question of which daily rates are to apply (the former or the new Schedule 2) the parties differ on the application of three steps in Schedule 3:
(a) Whether the defendants can claim costs for commencing their defence, both because no defence was in fact filed, and because of a change in wording between the old and the new Schedule 3;
(b)Whether the defendants are entitled to costs for filing of joint memoranda for mentions hearings on 29 March 2012 and 10 May
2012;
(c) Whether the defendants are entitled to the increased time allocation (under the new Schedule 3) for preparation of written submissions for the defended hearing.
[42] Item 2 of Schedule 3 (in both the new and the old Schedule) provides a time allocation of two days for the commencement of a defence. In the previous Schedule
3, the description of the step set out a number of matters that came into that step, including filing and serving the statement of defence. Under the new Schedule 3 the
specific aspects of the step are omitted. Counsel for the plaintiff argued that this was an indication that costs were not available for that step under the previous Schedule unless the defence had been commenced by filing and serving a statement of defence.
[43] Although there is some merit to the plaintiff’s argument (allowing costs only where a step is complete fits with the objective of the rules of bringing certainty), I do not regard this argument as determinative of the point. In a case such as this, where the defendant was not required to file a statement of defence before the application for summary judgment was determined, but all the lead-up work for a statement of defence had to be undertaken, it would be unrealistic and unreasonable to deny a defendant recovery if it is warranted on the facts of the case. In those circumstances, I consider that the Court can apply r 14.1, by reference to the time allocation available under item 2 of Schedule 3.
[44] The plaintiff’s objection to paying costs for the joint memoranda was that they were both short and prepared by plaintiff’s counsel. The defendants contend that focus on preparation overlooks consultation between counsel on the memoranda. I consider that the difference can be dealt with by application of the general discretion to make an appropriate allowance.
[45] The last point of contention concerns preparation of submissions for the defended hearing. Under the old Schedule, 0.25 of a day is allowed. Under the new Schedule, 1.5 days is allocated. This point is determined by the timing of preparation. If the preparation was all done before the new rules come into force, the old Schedule applies. If it was done after the new rules came into force, the new Schedule applies. If it is a hybrid, I consider that the Court ought to apply its discretion.
[46] Counsel for the defendants states that the preparation was completed before counsel for the plaintiff advised him that it would be discontinuing, and in his claim for costs says that that step was completed after 14 June 2012. In those circumstances I consider that the new Schedule should apply.
[47] Taking the above factors into account, I allocate time and recovery rates to the defendants as follows (working from their claim):
Pre 14 June 2012
(a) Item 2 Commencement of defence
(b) Item 5.2 Preparing and filing opposition (to summary judgment) and supporting affidavits
(c) Item 4.10 Joint memoranda (2) for mentions hearing
(d) Item 4.11 Appearance at mentions hearing 10 May 2012
1.5 days allowed at
$1,880
0.6 days allocated at $1,880
Allow 0.2 days each at $1,880
Allocate 0.3 days at $1,880
$2,820
$1,128
$752
$564
Post 14 June 2012
(e) Item 24 Preparation of written submissions
(f) Item 12 Appearance at hearing on 4 July 2012
Allocate 1.5 days at $1,990
Allocate 0.2 at days at $1,990
$2,985
$398
$8,647
(g) Disbursement Filing fee for opposition $108.80
$8,755.80
[48] I make an order, accordingly, that the plaintiff pay the defendants costs on
discontinuance in the total sum of $8,755.80.
Associate Judge Abbott
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