Huang v Chen
[2022] NZHC 2821
•31 October 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-100 CIV-2021-404-304
[2022] NZHC 2821
BETWEEN HONGZHAO HUANG
First Plaintiff
JIEYU LU
Second PlaintiffMATAKANA WINES LIMITED
Third PlaintiffAND
CHRIS CHEN
First Defendant
continued: …/2
Hearing: On the papers Counsel:
M D Pascariu for the Plaintiffs SRG Judd for the Defendants
Judgment:
31 October 2022
JUDGMENT OF GORDON J
[As to costs]
This judgment was delivered by me
on 31 October 2022 at 3 pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
Counsel: Solicitors:
M D Pascariu, Anderson Creagh Lai, Auckland William Gong Lawyers, Auckland SRG Judd, Barrister, Auckland
HUANG v CHEN [2022] NZHC 2821 [31 October 2022]
…/2
WAIHOPAI VALLEY VINEYARD LIMITED
Second Defendant
YI LU
Third DefendantDON CHEN
Fourth DefendantJINPING HUANG
Fifth DefendantQI YANG
Sixth DefendantADELAIDE EDUCATION GROUP PTY LIMITED
Seventh Defendant
Introduction
[1]This is an application for costs.
[2] The proceeding concerned various financial and contractual disputes between former friends and business associates, Hongzhao (Alex) Huang and Xiaolin (Chris) Chen. There were three plaintiffs: Mr Huang, his wife Jieyu (Chrissy) Lu, and their company Matakana Wines Ltd (Matakana). There were seven defendants: Mr Chen, his company Waihopai Valley Vineyard Ltd (Waihopai),1 his wife Jinping (Jackie) Huang, his brother Don Chen (20 per cent shareholder in Waihopai), Don Chen’s company Adelaide Education Group Pty Ltd (AEG),2 Yi Lu (director and 40 per cent shareholder in Waihopai) and Qi Yang (Yi Lu’s wife).
[3] On 4 August 2022 I delivered a judgment in favour of the plaintiffs.3 I found that there was no partnership agreement between the parties and that advances totalling over $2 million made by Mr Huang to Mr Chen/Waihopai were not investments in Waihopai but loans. I also found that Mr Chen was in breach of a Joint Venture Agreement between Mr Huang, Ms Lu and Mr Chen.
[4] In summary, the plaintiffs succeeded on each of the first to eighth causes of action.4 Mr Chen succeeded in part on the third counterclaim but failed on the other five counterclaims.
[5]I ordered:
(a)Mr Chen (first defendant) to transfer the title to the Matakana land, unencumbered, to Mr Huang and Ms Lu (first and second plaintiffs);
(b)Mr Chen to pay the plaintiffs $3 million in equitable damages;
1 Chris Chen was one of two directors and three shareholders in Waihopai Valley Vineyard Ltd. He held a 40 per cent share on paper but essentially controlled the company.
2 Don Chen is one of three directors and shareholders of Adelaide Education Group Pty Ltd, which has its registered office in Australia.
3 Huang v Chen [2022] NZHC 1888.
4 It was not necessary to make a decision on the ninth cause of action.
(c)Mr Chen, and in the alternative, Waihopai, and in the further alternative, all defendants, to pay the plaintiffs $2,376,261.00 plus interest under s 12 of the Interest on Money Claims Act 2016; and
(d)Matakana Wines (third plaintiff) to pay Mr Chen the sum of
$530,784.00.
[6] I reserved costs and observed that, as the successful parties, the plaintiffs were prima facie entitled to costs. I directed that the parties were to file a joint memorandum if costs were agreed. The parties were to file and serve separate costs memoranda in the event they could not agree.5
[7]The parties have been unable to agree costs.
[8]The plaintiffs seek $865,815.24 in total, being $519,298.79 in costs and
$346,516.45 in disbursements. These figures include claims for indemnity and increased costs in respect of certain steps in the proceedings, and $193,2666 in fees for their accounting expert, Jason Weir.
[9] The defendants say that the plaintiffs are only entitled to scale costs on a 2B basis. On my calculation this would total $246,170. The defendants also say that there are some duplicated steps that are not properly claimed. They further challenge the quantum of Mr Weir’s fees.
Procedural background
[10] The plaintiffs issued the original proceeding7 against Mr Chen as sole defendant in January 2019 (the Chen proceeding). As part of their claim, the plaintiffs sought repayment of an advance made to Mr Chen to save his business, Waihopai, from insolvency.
5 At [414].
6 Excluding GST.
7 CIV-2019-404-100.
[11] In a brief of evidence dated 19 February 2021, prepared for the scheduled hearing the following month, Mr Chen stated that he had sold Waihopai in December 2020 and distributed the proceeds of sale.
[12] On 23 February 2021, the plaintiffs applied for urgent freezing orders against Mr Chen and three other persons who had received a share of the proceeds of sale.
The orders were granted, and a reasons judgment issued on 2 March 2021.8
[13] Along with the application for freezing orders, the plaintiffs commenced a second proceeding9 against Waihopai (as the sole defendant) and filed a new statement of claim on 23 February 2021 (the Waihopai proceeding). The scheduled hearing for the Chen proceeding did not go ahead on 8 March 2021. The Chen proceeding and the Waihopai proceeding were then consolidated, and an amended statement of claim filed on 12 April 2021 against Mr Chen, Waihopai and five further defendants (as identified above at [2]) (the consolidated proceeding).
Legal principles
[14] The Supreme Court has recently confirmed that the general approach to costs is to “make awards of costs which are a reasonable contribution to the costs actually incurred although retaining a discretion to make a higher award if that is considered just”.10
[15] The award of costs and disbursements is governed by part 14 of the High Court Rules 2016 (the Rules). The Court has a broad discretion to award the costs of a proceeding.11 The principles governing the determination of costs include:12
(a)the party who fails with respect to a proceeding should pay costs to the successful party;
(b)an award of costs should:
8 Huang v Waihopai Valley Vineyard Ltd [2021] NZHC 348.
9 CIV-2021-404-304.
10 Trans-Tasman Resources Ltd v Taranaki-Whanganui Conservation Board [2022] NZSC 63 at [9].
11 High Court Rules 2016, r 14.1.
12 Rule 14.2(1)(a), (b), (f) and (g).
(i)reflect the complexity and significance of the proceeding;
(ii)not exceed the actual costs incurred;
(iii)be predictable and expeditious.
[16] The usual way of determining costs is by applying the appropriate daily recovery rate (set under the Rules) to the time taken for each step required by the proceeding.13 The time taken must be objectively reasonable and does not necessarily reflect the time actually spent.14
[17] Nevertheless, the Court may grant costs which are higher than those otherwise payable under the Rules (increased costs) or the actual costs, disbursements, and witness expenses reasonably incurred by a party (indemnity costs).15
[18]The Rules provide that the Court may order increased costs if:16
(a)the nature of the proceeding or the step in it is such that the time required by the party claiming costs would substantially exceed the time allocated under band C; or
(b)the party opposing 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 with 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, 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
…
….
13 Rule 14.2(1)(c).
14 Rule 14.2(1)(e).
15 Rule 14.6.
16 Rule 14.6(3).
[19]More serious misconduct may warrant an order of indemnity costs if:17
(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
…
[20] In Bradbury v Westpac Banking Corp, the Court of Appeal held that indemnity costs may be ordered against a party who has behaved either badly or very unreasonably.18 Indemnity costs are exceptional and require flagrant misconduct.19 Examples of qualifying conduct include, but are not limited to:20
(a) the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud;
(b) particular misconduct that causes loss of time to the court and to other parties;
(c) commencing or continuing proceedings for some ulterior motive;
(d) doing so in wilful disregard of known facts or clearly established law; or
(e) making allegations which ought never to have been made or unduly prolonging a case by groundless contentions ...
[21] In addition to specified misconduct, the courts may order either increased or indemnity costs if some other reason exists which justifies such an order, despite the principle that the determination of costs should be predictable and expeditious.21
[22] Disbursements are expenses paid or incurred for the purposes of the proceeding separate from legal fees.22 Expert fees may be claimed if reasonable in amount, specific to the proceeding, and reasonably necessary for the conduct of the proceeding.23 A disbursement may be disallowed or reduced if it is disproportionate
17 Rule 14.6(4).
18 Bradbury v Westpac Banking Corp [2009] 3 NZLR 400 (CA) at [27].
19 At [28].
20 At [29].
21 Rule 14.6(3)(d) and (4)(f).
22 Rule 14.12 (1)(a).
23 Rule 14.12(2)(a)(i), (b)–(d).
in the circumstances of the proceeding24 and the Court may call for a report on the reasonableness of a disbursement.25
[23] Where a court orders costs against two or more parties, costs liability is joint and several unless the court otherwise directs.26
Indemnity Costs
[24] The plaintiffs seek indemnity costs totalling $138,756.52 for attendances relating to the freezing orders.
[25] Counsel for the plaintiffs, Mr Pascariu, submits that the sale of Waihopai’s assets and distribution of sale proceeds just before the scheduled trial was intended to render Mr Chen and Waihopai judgment-proof. These actions forced the plaintiffs to apply for freezing orders and pursue otherwise unnecessary claims. While scale costs were ordered at the time, the Court reserved leave to the plaintiffs to seek indemnity or increased costs.
[26]Mr Pascariu submits that the defendants’ misconduct resulted in:
(a)wasted costs for the plaintiffs (particularly in relation to work undertaken to preserve their ability to recover if successful at trial), and
(b)loss of time to the Court and the plaintiffs.
[27] Mr Pascariu refers to Bradbury v Westpac, where the Court of Appeal awarded indemnity costs in relation to freezing orders.27
[28] In response, Mr Judd, counsel for the defendants, submits that the relevant basis for indemnity costs relates to a party’s conduct in a proceeding,28 rather than conduct that has led to a proceeding. Mr Judd submits that as the only proceeding on
24 Rule 14.12(3).
25 Rule 14.12(5)(a).
26 Rule 14.14.
27 Bradbury v Westpac Banking Corp, above n 18, at [27]–[28].
28 Rule 14.6(4)(a) or (b).
foot at the time the plaintiffs applied for freezing orders was the claim against Mr Chen personally, there is no legal basis for indemnity costs. The defendants accept that the sale of Waihopai and distribution of proceeds of sale was conduct which caused the plaintiffs to commence the Waihopai proceeding. However, Mr Judd submits this does not justify indemnity costs. He says that Mr Chen did not conceal information about the sale; rather, he disclosed it in his brief of evidence.
Discussion
[29] In Paper Reclaim Ltd v Aotearoa International Ltd, the Court of Appeal held that the trial court judge erred in awarding indemnity costs on the basis of misconduct of the parties which occurred prior to the proceeding.29 This finding was approved on appeal to the Supreme Court which confirmed that “conduct prior to a proceeding is not misconduct in defending the proceeding or a step in the proceeding”.30 However, the relevant conduct in Paper Reclaim was general conduct occurring from 1999 through to February 2001,31 prior to the events which triggered the proceeding. In the present case, I found that the conduct of Mr Chen and Yi Lu, in selling Waihopai and putting the proceeds of the sale beyond the reach of the plaintiffs as creditors, occurred in response to the Chen proceeding and in the course of progressing that proceeding to court. In my view, this constitutes misconduct in the proceeding as discussed below.
[30] The application for freezing orders was decided in this Court by Justice Duffy.32 The Judge commented on the defendants’ conduct as follows:
[18] At the time the freezing and ancillary orders were made on 24 February 2021 the evidence of a real risk of dissipation could be inferred from the conduct of Waihopai’s directors in deciding to sell the company’s primary asset so close to the trial date of the Chen claim as well as the circumstances in which it was sold. Nothing was said to the plaintiffs about the sale until after it had occurred. The property was considered relevant to the Chen claim because the October 2020 valuation was discovered in that claim. This suggests that developments relevant to the property, particularly a plan to sell it and the execution of a sale and purchase agreement, should also have been discovered as they arose rather than after the sale was settled. The failure to disclose this information earlier on is consistent with Waihopai’s directors wanting to deprive the plaintiffs of the opportunity to stop the sale of the property or to take steps to preserve the proceeds of its sale. As it is the
29 Paper Reclaim Ltd v Aotearoa International Ltd [2006] 3 NZLR 188 (CA) at [160].
30 Paper Reclaim Ltd v Aotearoa International Ltd [2007] NZSC 26, 3 NZLR 169 at [41].
31 Paper Reclaim Ltd v Aotearoa International Ltd [2006], above n 29, at [160].
32 Huang v Waihopai Valley Vineyard Ltd, above n 8.
plaintiffs have taken steps in this direction, but under urgency and therefore with more limited opportunity to prepare their case.
[31] In addition, the Judge expressed concern that counsel appearing for Waihopai was unable to inform the Court about: (a) the sale price; (b) the whereabouts of the proceeds of sale; and (c) the proposed use of those proceeds, as he had not been instructed in these matters. The Judge held that:33
This information should have been readily obtainable from his client. Instead, Court enquiries were met with a blank wall. This reinforced the plaintiff’s argument regarding a real risk that the sale proceeds would be dissipated.
[32] In the substantive decision, I found that Mr Chen and Yi Lu deliberately dissipated Waihopai’s assets in order to prejudice the plaintiffs as creditors:
[381] I accept the payments made to Mr Chen, Don Chen and Yi Lu following the sale of Waihopai’s assets were intended to prejudice and had the effect of causing prejudice to the plaintiffs as creditors of Waihopai. At the time of those payments the plaintiffs were seeking the recovery of the Waihopai advances in proceedings against Mr Chen. Those claims included orders that, if necessary, Mr Chen procure Waihopai to pay the Waihopai advances to the plaintiffs. Mr Chen and Yi Lu caused Waihopai to pay all of the sale proceeds to themselves and to Don Chen with no payments made to the plaintiffs and again Mr Chen only disclosed the sale of Waihopai to the plaintiffs after the proceeds had been dissipated from the company.
[33] I do not accept the defendants’ submission that this conduct occurred prior to the proceeding rather than during or as part of it. The Chen proceeding was filed in January 2019. The proceeding sought recovery of loans which the plaintiffs alleged were made to Mr Chen, but as noted in [381] of the substantive decision set out in [32] above the plaintiffs sought an order that if necessary Mr Chen procure Waihopai to pay the Waihopai advances to the plaintiffs.
[34] On 10 December 2020, Mr Chen and Yi Lu entered into an agreement to sell Waihopai. Within one business day, Waihopai distributed total cash proceeds close to
$7.5 million to Mr Chen, Yi Lu and Don Chen. On 20 December 2020, the parties met at a commercial mediation which was unsuccessful. The sale of Waihopai was disclosed on 22 February 2021, in a brief of evidence prepared for trial, three days after the sale was finalised and just prior to the hearing scheduled for 8 March 2022.
33 At [22].
Mr Chen made the disclosure knowing that the assets had already been distributed. The application for freezing orders was filed, and orders were made on 2 March 2021.
[35] After being notified of the plaintiffs’ application, Mr Chen, Don Chen and Yi Lu each made payments or further transfers of the funds they had recently received from Waihopai: Mr Chen discharged a mortgage against his home; Don Chen made various payments to his family members and the seventh defendant, AEG; and Yi Lu transferred his share of the sale proceeds to the sixth defendant, his wife Qi Yang.
[36] Clearly, the Chen proceeding to recover money allegedly loaned to Mr Chen, but with an order sought that he procure that sum from Waihopai, was already afoot when Mr Chen sold the company and distributed the proceeds of sale. The application for freezing orders was underway at the time further distributions were made. At each stage, Mr Chen’s conduct prejudiced the plaintiffs as creditors. He acted knowing that if the plaintiffs’ proceeding against him was successful, he would be required to repay the loans made to him by Mr Huang. As stated in my judgment, in all those circumstances Mr Chen’s conduct bears the hallmark of steps taken with the intention to render Waihopai and Mr Chen judgment-proof.34 It falls squarely within the category of conduct in r 14.6(4)(a): where a party has acted improperly in defending a proceeding.
[37] As regards Mr Pascariu’s submission regarding wasted costs, I consider any preparation undertaken for the hearing scheduled for 8 March 2021 could have been later utilised for the hearing of the consolidated proceeding. Further, the adjournment of the 8 March 2021 hearing was sought by consent with “no issue as to costs”. Also the first day of the scheduled hearing was utilised to address the plaintiffs’ application to extend the freezing and ancillary orders.
[38] I accept, however, beyond that, Court time was lost. I also accept it was necessary for the plaintiffs to make their application for freezing orders to preserve their ability to recover if they were later successful at trial. It was Mr Chen’s conduct (and that of Yi Lu) that necessitated the plaintiffs’ application for freezing orders.
34 At [383].
[39] Steps relating to the application for freezing orders occurred over a relatively confined period of time between 23 February 2021 and 27 May 2021. Indemnity costs are also claimed for three steps taken after that date. In my view these three steps are not substantially related to the freezing orders and should be claimed as ordinary scale costs. These are:
28/05/2021 Plaintiffs’ memorandum for case management conference 8/06/2021 Plaintiffs’ memorandum for priority fixture 18/06/2021 Plaintiffs’ reply memorandum re priority fixture
[40] By way of explanation, in relation to the first item above, the plaintiffs had applied to extend the freezing orders. The defendants opposed the application and had made their own application to vary/discharge the freezing orders. On 27 May 2021, after submissions had been prepared by the plaintiffs, the defendants withdrew their application and consented to the freezing orders continuing indefinitely. The memorandum for the case management conference did rehearse that background but it addressed a number of other matters relating to the proceeding more generally. For that reason I disallow the claim for indemnity costs for this step.
[41] The second two items above relate to the trial generally and not the application for freezing orders. For that reason I disallow the claim for indemnity costs for these two items.
[42] For all the above reasons, I find that indemnity costs are warranted in relation to the application for freezing orders. I am satisfied that in these particular circumstances Mr Chen acted improperly in defending a proceeding (r 14.6(4)(a)) and the amount claimed was reasonably incurred. However, I find that indemnity costs have been incorrectly claimed for the three steps after 27 May 2021. These will be treated in the same way as other costs after this date.
[43] Additionally, I propose to disallow the claim for indemnity costs for preparing a consolidated statement of claim (discussed at [64] below).
[44]The total allowed as indemnity costs is $107,883.44.
Increased costs
Plaintiffs’ position
[45] Apart from steps for which indemnity costs are claimed, the plaintiffs seek increased costs for all steps taken after 22 January 2021. In particular, they seek two thirds of the actual time spent on two steps – preparing briefs of evidence and trial preparation – and a 50 per cent uplift on all other steps. Mr Pascariu submits that the defendants have contributed unnecessarily to the time and expense of the consolidated proceeding by failing, without reasonable justification, to comply with orders for discovery and by further dissipating Waihopai’s assets knowing the plaintiffs had filed an urgent application for freezing orders. He says this warrants a 50 per cent uplift on all steps and two thirds of actual time on the two steps with the highest time allocation.
Failure to comply with discovery orders
[46] Mr Pascariu submits that Mr Chen failed to provide discovery of relevant financial information in a timely manner, throughout the proceeding, including:
(a)Waihopai’s annual financial statements from March 2020 (discovery sought in March 2020; claimed unlocatable in June 2020; disclosed in January 2021); and
(b)Waihopai’s general ledger files from 3 March 2021 (discovery orders made by consent in May 2021; files disclosed on 20 April 2022).
[47] Mr Pascariu says that the delay in providing the ledger files increased the time which the plaintiffs’ accounting expert, Jason Weir, had to spend on preparing his evidence. He says Mr Weir had to make assumptions in his brief of evidence and then update his conclusions following disclosure.
Dissipation of Waihopai’s assets
[48] Mr Chen did not disclose the sale of Waihopai’s assets until after settlement was complete and the sale proceeds had been distributed. Mr Pascariu submits this significantly increased the plaintiffs’ costs. He refers the Court to Wilburn Furniture
and Restorations Ltd (in liq) v Gledhill,35 in which increased costs were awarded against company directors who had knowingly stripped a company of its assets to put them beyond the reach of creditors.
Preparation of plaintiffs’ briefs of evidence
[49] The plaintiffs claim 11.3 days for preparation of briefs of evidence. This is two-thirds of actual time spent (17.06 days) and represents approximately 1.13 days per brief. There were six primary briefs and four supplementary/reply briefs, totalling over 270 pages. Mr Pascariu says that the evidence, particularly the accounting evidence, was reasonably complex.
Preparation for trial
[50] The plaintiffs claim 52.4 days for trial preparation. This is two thirds of actual time spent (78.6 days) and represents 4 days preparation for each day of trial. Mr Pascariu says trial preparation involved both senior and junior counsel, and included drafting or preparing opening submissions, presentation materials, cross- examination questions and closing submissions. Counsel were required to address complex contentious evidence, respond to six counterclaims and two affirmative defences, and address a claim of partnership which was raised very late in the proceedings. The plaintiffs also claim costs for the appearance of second counsel for the trial.
Case law
[51]Mr Pascariu refers the Court to the following cases, for comparison:
(a)In Trustpower v Commissioner for Inland Revenue, the Court allowed 29 days for preparation of briefs where the plaintiff had spent 89.7 days and sought 39.85 days; the Court also awarded 30 days for preparation where the plaintiff’s lawyers spent 116.2 days preparing for a 16-day trial involving witnesses; 36
35 Wilburn Furniture and Restorations Ltd (in liq) v Gledhill [2016] NZHC 549.
36 Trustpower v Commissioner for Inland Revenue [2014] NZHC 3072 at [42] and [50].
(b)In Sovereign Assurance Co Ltd v Commissioner for Inland Revenue, the Court appeared to allow 50 days for preparation where the Commissioner claimed 60 days, having actually spent 100 days on preparation for the 21-day trial;37 and
(c)In Kidd v van Heeren, the Court allowed 50 days for preparing written submissions for a 5-day hearing involving a complex interlocutory application, where counsel had spent 64.36 days on that step.38
Defendants’ position
[52] In response, Mr Judd says that neither of the issues raised by Mr Pascariu (being alleged failure to provide discovery and dissipation of assets) justifies increased costs under the Rules. Further, Mr Judd submits that actual time is not relevant to the Court’s assessment of reasonable time,39 and yet the plaintiffs rely on the actual number of days counsel spent on preparing briefs and preparing for trial when claiming costs for these two steps.
[53]Mr Judd also says that the plaintiffs’ schedule includes duplicated steps:
(a)Item 20 (discovery) is included six times; and
(b)Item 1 (commencement) is included three times.
In regard to item 20, Mr Judd says that provision of Willow Flat documents during the trial was not discovery and should not be counted as such.
[54] Mr Judd submits this was a case of average complexity with the usual mix of disputed facts and issues of law. It was neither simple nor overly complex. He says the principle that the determination of costs should be predictable and expeditious should be given priority and costs awarded on a 2B basis without duplication of steps.
37 Sovereign Assurance Co Ltd v Commissioner for Inland Revenue [2012] NZHC 3573 at [12].
38 Kidd v van Heeren [2015] NZHC 3191 at [98]–[99].
39 Rule 14.2(1)(e).
Discussion
[55] In Holdfast NZ Ltd v Selleys Pty Ltd, the Court of Appeal provided guidance on the correct approach to an award of increased costs:40
(a)first, the proceeding must be categorised for the purposes of r 14.3;
(b)second, a reasonable time must be determined for each step in the proceeding by applying the bands in r 14.5, including any uplift;
(c)finally, the applicable daily rate is applied to the time so determined; and
(d)any further grounds for increased costs are then considered.
[56] The parties agree that the proceeding should be categorised as Category 2 under r 14.3(1) and that reasonable time should be determined with reference to band B under r 14.5(2). The plaintiffs have provided a schedule identifying each step and the scale cost calculated by applying the appropriate daily recovery rate in sch 2 of the Rules to the time allocation, as required by r 14.4. Following Holdfast, an assessment of grounds for increased costs is made as a final step.
Dissipation of Waihopai’s assets
[57] I accept Mr Judd’s submission that the dissipation of Waihopai’s assets does not fall squarely within the reasons provided for an award of increased costs, set out at r 14.6(3). But more significantly, I have already allowed a claim for indemnity costs having regard to the conduct which triggered the applications for freezing orders (above at [42]). I do not propose to make a separate award of increased costs for further steps taken after the application for freezing orders was granted, and subsequent related steps taken, on the basis of the same conduct.
40 Holdfast NZ Ltd v Selleys Pty Ltd (2005) 17 PRNZ 897 at [37]–[48].
Failure to comply with discovery orders
[58] The Rules clearly state that the Court may grant increased costs where the party opposing costs has contributed unnecessarily to the time or expense of the proceeding or step in it by failing to comply with an order for discovery.41 In this case, I accept that Mr Chen failed to comply with the Court-ordered timetable for discovery as submitted by Mr Pascariu. In these circumstances, the Court needs to consider the effect that delayed disclosure had on the plaintiffs’ ability to prepare for trial.
[59] I accept that late disclosure of Waihopai’s annual financial statements and general ledger files is likely to have increased the time involved in preparing briefs of evidence especially in relation to the accounting evidence. I accept that counsel for the plaintiffs would have been required to work with Mr Weir on trial issues in relation to his amended brief of evidence prepared following discovery. I consider an uplift of 20 per cent on scale 2B costs would be appropriate to reflect the additional time counsel for the plaintiffs was required to spend on this step. This does not reflect Mr Weir’s fees for his own contribution of time, which will be assessed separately as an aspect of disbursements. Scale 2B costs for preparation of briefs is $24,497.50. An increase of 20 per cent would bring this figure to $29,397. However, the plaintiffs seek two thirds of actual time for this step, which they calculate as being $27,007. I therefore award increased costs of $27,007, as sought, for preparation of briefs of evidence.
[60] In my view, this is not a case where increased costs are warranted for all steps. Any claim for increased costs must involve a consideration of each step. It is not necessarily appropriate to claim a 50 per cent uplift overall. It is not clear how delayed disclosure impacted on trial preparation generally or any other steps. The effect on the plaintiffs’ ability to prepare for trial was specific to the need to reconsider accounting evidence in light of financial information about Waihopai which was disclosed at a late stage. I therefore decline to award increased costs for any step other than preparation of briefs of evidence.
41 Rule 14.6(3)(b)(iv).
Duplication
[61] Mr Judd says that ‘Step 1: Commencement of proceeding by plaintiff’ is included three times.
[62] However, steps taken on 31 January 2019 and 23 February 2021 concern the commencement of different proceedings, namely the Chen proceeding and the Waihopai proceeding. The third claim for Step 1, dated 12 April 2021, concerns an amended statement of claim, filed for the consolidated proceeding. Amended pleadings must be filed under r 7.77 of the Rules. Subrule (8) states that:
If an amended pleading has been filed under this rule, the party filing the amended pleading must bear all the costs of and occasioned by the original pleading and any application for amendment, unless the court otherwise orders.
[63] This rule means that a party will only be allowed to seek costs for either the original statement of claim or the amended statement of claim, but not both. Where a plaintiff files an amended statement of claim and ultimately succeeds in the proceeding, the plaintiff will only be allowed the costs of one statement of claim.42 The converse applies to a successful defendant who amends the statement of defence and is successful.43
[64] I have reviewed the statements of claim for the Chen proceeding, the Waihopai proceeding and the consolidated proceeding. It is clear that the statement of claim for the consolidated proceeding incorporates and extends those prepared for the two earlier proceedings. The rationale behind r 7.77(8) is that a party may not double count work done at the commencement of a proceeding when seeking costs. For this reason, the commencement costs for the two proceedings (on 31 January 2019 and 23 February 2021) are valid, but the third claim for step 1 (dated 12 April 2021) is disallowed in full. The plaintiffs seek indemnity costs of $21,313.08 for the third claim.44 Rule 7.77(8) makes it clear that no recovery, indemnity or otherwise, is available for this step.
42 See Rorison v McKey (No 2) [1952] NZLR 724 (SC).
43 Andrew Beck and others McGechan on Procedure (online ed, Thomson Reuters) at [HR7.77.09].
44 See Schedule 3 annexed to Memorandum of counsel for plaintiffs as to indemnity costs dated 14 October 2022.
[65] The plaintiffs seek costs for ‘Step 20: List of documents on discovery’ six times as follows:
7 November 2019 Plaintiffs’ discovery Chen 9 September 2020 Further discovery Chen 10 September 2021 Supplementary affidavit of documents for plaintiffs Consolidated 13 December 2021 Supplementary affidavit of documents for plaintiffs Consolidated 10 March 2022 Supplementary affidavit of documents for plaintiffs Consolidated 26 May 2022 Willow Flat discovery Consolidated
[66] Discovery is an expensive step; at 2B it warrants costs of $5,975.00 for each discovery, to reflect a time allocation of 2.5 days. I am not convinced that further or supplementary discovery justifies the same time allocation as the first discovery. I also accept Mr Judd’s submission that Step 20 is not intended to include discovery of documents ordered during trial.
[67] The Willow Flat discovery on 26 May 2022 was made during trial, in response to an order I made for production of documents by way of a trial ruling, pursuant to r 8.19 of the Rules. Specifically, I ordered the second plaintiff, Ms Lu, and her former solicitor, Brad Botting, to provide the plaintiffs’ solicitors with all documents relating to the purchase of a property at Willow Flat by Ms Lu (or her company). Mr Botting was not the solicitor on the record. Discovery was therefore undertaken by one of the parties and her former solicitor. While I accept that the plaintiffs’ solicitors would have been required to review the documents for privilege (in the end privilege was not claimed), this would not have taken anywhere near the allocated time of 2.5 days. I disallow the claim for the Willow Flat discovery in total.
[68] Determination of a reasonable time must be made by reference to the bands in sch 3 of the Rules. Schedule 3 does not provide a separate time allocation for supplementary discovery. It is therefore appropriate to rely on the time allocation set out by a lower band.
[69] The claim for costs for the first discovery on 7 November 2019 is allowed in full at a band B time allocation of 2.5 days. The four further or supplementary instances of discovery are awarded at the band A time allocation of 0.7 days, given
that I consider a comparatively small amount of time to be reasonable for supplementary discovery.45
[70] Having disallowed one claim for discovery in full, and reduced the available time allocation for four instances of discovery to 0.7 days each, the total awarded to the plaintiffs for steps taken after 23 February 2021 (excluding indemnity and increased costs) is $118,663.50.
Disbursements
[71] The plaintiffs seek $193,466 (excluding GST) in disbursements for the cost of engaging Mr Weir, their expert accounting witness. They say that Mr Weir’s fees should be recoverable in full.
[72] Mr Pascariu submits the Court found Mr Weir’s evidence of assistance. The Court acknowledged that Mr Weir’s evidence dealt with a number of topics, including Waihopai’s equity and solvency position, that Mr Weir was able to extract and reconstruct the balance sheets for 2012 to 2014, and that Mr Weir’s evidence demonstrated that Waihopai was insolvent from at least 2013 onwards.46
[73] Further, Mr Weir was the most significant of the plaintiffs’ witnesses; his briefs of evidence were long, including a number of technical schedules; and his evidence corresponded to the entire scope of the plaintiffs’ case in response to the partnership claim.
[74] If Mr Weir’s fees are seen as high (which is denied), Mr Pascariu says that is not surprising given the nature of the case and the fact that Mr Weir’s preparation time was increased by Mr Chen’s failure to provide Waihopai’s financial records promptly.
Defendants’ position
[75]The defendants accept liability for non-expert disbursements totalling
$100,326.74. They also accept expert witness fees charged as disbursements for
45 Rule 14.5(2)(a).
46 Huang v Chen, above n 3, at [228].
Dr Liao and Mr Hanlon, totalling $49,621.60. However, they say the quantum of Mr Weir’s fees is unreasonable. Mr Judd submits that the claim should be reduced by at least half.
[76] Mr Judd submits the accounting information was not significantly in dispute, given that Maggie Fu had handled the company accounts for many years and her accounting was generally accepted by Mr Chen. Mr Judd submits that Mr Weir could have saved time by discussing the accounting with Ms Fu, who was a witness for the plaintiffs. Instead, he says that Mr Weir spent substantial time attempting to re-create and understand the way Ms Fu had prepared the accounts.
[77] Mr Judd acknowledges that Mr Weir’s opinion evidence, that shareholder advances treated as equity should have been treated as debt, was significant to the proceeding. However, he says this opinion could have been provided without the extensive work apparently done on the undisputed accounting records.
Discussion
[78] A successful party is generally entitled to recover the actual expenses of its expert witnesses provided they satisfy the criteria in r 14.12(2): namely, it is both specific to and reasonably necessary for the conduct of the proceeding, and reasonable in amount.47 The only basis for reducing expert fees is if they reflect time spent on tasks beyond the scope of preparing and giving evidence, critiquing the evidence of opposing experts, and assisting counsel to understand the issues and prepare cross- examination.48
[79] Mr Weir prepared two briefs of evidence: one before and one after the delayed discovery of accounting records for Waihopai.
[80] I accept Mr Pascariu’s submission that Mr Weir’s evidence was useful to the Court; his evidence was long, detailed and specific to the plaintiffs’ case in relation to the issue of whether a partnership existed. He was able to extract and reconstruct
47 Air New Zealand Ltd v Commerce Commission [2007] NZCA 27, [2007] 2 NZLR 494 at [47].
48 Air New Zealand Ltd v Commerce Commission, above n 47, at [62].
relevant balance sheets and demonstrate that Waihopai was insolvent from at least 2013 onwards.
[81] I have reviewed Mr Weir’s invoices and the narrations in those invoices. I find that all the tasks detailed on these invoices were specific to and reasonably necessary for the conduct of the proceeding. The hourly rate charged in each invoice appears to be a blended charge, reflecting the combined contributions of team members and their different hourly rates. Although the Court is not offered comparative hourly rates I accept that a rate of up to $750 per hour for an expert of Mr Weir’s seniority is unremarkable. However, although that is Mr Weir’s standard hourly rate, in the engagement letter it was reduced to $650 per hour with further discounts applied to give an effective hourly rate for Mr Weir of $431.25. His team members were charged at a lower rate. The only issue is the number of hours Mr Weir and his team spent on each task and whether this time was reasonably necessary.
[82] I accept that Mr Weir could have spoken to Ms Fu and sought factual information from her, and this may have meant a reduction in time. However, as an expert witness he would still have been required to assess the records for himself. While I found Ms Fu to be a reliable witness,49 she was not able to provide the same level of independent expert analysis as Mr Weir. Any deduction for time Mr Weir could have saved by talking to Ms Fu is necessarily made on the basis of a broad estimate. In my view, a reduction of 30 hours is appropriate. Given Mr Weir’s effective hourly rate of $431.25, this equates to a reduction in costs of $12,937.50. Mr Weir’s fees were otherwise reasonable in amount.
[83] For the above reasons, I award the actual cost of Mr Weir’s expert witness fees with a deduction of $12,937.50, bringing the total to $180,529.01.
[84] I have also identified an error in the plaintiffs’ disbursements claim for Dr Liao’s expert fees, as set out in Schedule 2 of the submissions of counsel for the plaintiffs. The 3 February 2021 claim for $3,101.60 relates to an invoice of that date from Dr Liao to Bell Gully. The 12 March 2021 entry relates to an invoice from Bell Gully to the plaintiffs for fees for the period from 2 February 2021 to 27 February
49 Huang v Chen, above n 3, at [338].
2021, including a fee of $3,101.60 for Dr Liao. This is clearly a duplication. Confusingly, the total expert fees claimed in relation to Dr Liao – $32,006.60 – only counts one of the invoices, while the total expert fees claimed – $246,189.71 – counts both. This error has resulted in a series of incorrect calculations and totals.
[85] The amount of $3,101.60 is therefore disallowed in full and deducted from all further calculations relating to or including disbursements.
Apportionment
[86] The parties agree that costs and disbursements in relation to the Chen proceeding up to the date of 23 February 2021 should be ordered against Mr Chen only. The defendants further say that costs and disbursements incurred after 23 February 2021 should be apportioned 80 per cent to Mr Chen and 20 per cent to all defendants jointly and severally, rather than awarded against all defendants.
Discussion
[87] There are seven defendants in this proceeding. In my judgment, I found that each of the defendants was a person who received property through a prejudicial disposition, having received amounts from Waihopai’s sale proceeds.50
[88] However, I accept that the claims and counterclaims in this case were principally between the plaintiffs and the first defendant, Mr Chen. The Chen proceeding was against Mr Chen only. In the consolidated proceeding, the causes of action relating to Matakana involved Mr Chen only. The primary claim in respect of the Waihopai advances was that money had been loaned to Mr Chen and/or Waihopai. The other defendants were involved only because they received funds from the sale of the Waihopai vineyard (although Yi Lu was also involved in distributing the sale proceeds). Although the claims in the Chen proceeding and the Waihopai proceeding were consolidated, the central issue at trial was the nature of the financial relationship between the plaintiffs and Mr Chen.
50 Huang v Chen, above n 3, at [382].
[89] In terms of outcome, Mr Chen personally has been held liable to transfer the Matakana land (worth approximately $10 million) and pay damages of $3 million. Mr Chen and the other defendants have been held jointly liable for the Waihopai loans (approximately $2.37 million). I accept the defendants’ submission that this means the other defendants are liable with Mr Chen for about 16 per cent of the total and Mr Chen is solely liable for the balance.
[90] I agree that the apportionment of costs and disbursements should be consistent with the outcome of the substantive judgment.
Summary
[91] Indemnity costs are awarded for steps relating to the application for freezing orders taken between 23 February 2021 and 27 May 2021 (inclusive), with the exception of a claim for an amended statement of claim (consolidated proceeding), which is disallowed. The three steps referred to in [39] above, which occurred after 27 May 2021, are excluded from the award of indemnity costs for reasons given above at [40]–[41]. The total award for indemnity costs is $107,883.44 (calculated as
$138,756.52 – $30,873.08).
[92] 2B scale costs are awarded for all other steps with one exception: step 33, preparation of briefs of evidence, dated 18 May 2022, attracts increased costs at two thirds of actual time spent, being $27,007.00. This reflects the additional time spent on this step as a consequence of the defendants’ failure to provide discovery in accordance with the timetable directions.
[93] One claim for discovery (during trial) is disallowed, and four claims for discovery at band B are reduced to a band A time allocation to reflect the fact that they were supplementary in nature.
[94] In terms of the separate proceedings, a total of $45,649 is awarded as costs for the Chen proceeding. This represents all steps prior to the commencement of the Waihopai proceeding on 23 February 2021. All steps are awarded at 2B scale costs, with the exception of the second claim for step 20 ‘Discovery’ which is awarded at 2A scale costs to reflect the supplementary nature of this step.
[95] For the Waihopai/consolidated proceeding a total of $253,553.94 in costs is awarded. This includes $107,883.44 in indemnity costs for steps relating to the freezing orders and increased costs of $27,007 for the preparation of briefs. All other steps are awarded 2B scale costs totalling $118,663.50.
[96] A deduction of $12,937.50 is made from the actual costs of expert fees charged by Mr Weir in relation to the consolidated proceeding, to reflect time which could have been saved by obtaining factual information from Ms Fu. Total fees for Mr Weir for the consolidated proceeding are therefore awarded in the sum of $180,529.01. A further deduction of $3,101.60 is made to correct an error in the plaintiffs’ calculation of Dr Liao’s fees. Disbursements are otherwise awarded in full, as sought.
[97]This results in the following awards in favour of the plaintiffs:
Costs Disbursements Total Chen proceeding $45,649.00 $110,670.68 $156,319.68 Waihopai/consolidated proceeding $253,553.94
$219,806.67
$473,360.61
Total $299,202.94 $330,477.35 $629,680.29
[98] The total costs and disbursements for the Chen proceeding will be awarded against Mr Chen alone. 80 per cent of costs and disbursements for the consolidated proceeding (calculated at $378,688.49) will be awarded against Mr Chen alone, with the remaining 20 per cent ($94,672.12) awarded against all seven defendants, jointly and severally, including Mr Chen.
Result
[99]I make the following orders in favour of the plaintiffs:
(a)$156,319.68 for costs and disbursements against the first defendant in relation to proceeding CIV-2019-404-100 up to the date of 23 February 2021.
(b)$378,688.49 (80 per cent share of $473,360.61) for costs and disbursements against the first defendant in relation to proceeding CIV- 2021-404-304 arising after the date of 23 February 2021.
(c)$94,672.12 (20 per cent share of $473,360.61) for costs and disbursements against all defendants jointly and severally in relation to proceeding CIV-2021-404-304 arising after the date of 23 February 2021.
Gordon J
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