Hum Hospitality Limited v Stylo Medical Services Limited
[2021] NZHC 1287
•2 June 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2016-404-636
[2021] NZHC 1287
BETWEEN HUM HOSPITALITY LIMITED
Plaintiff
AND
STYLO MEDICAL SERVICES LIMITED
First Defendant
SHEN TAT OOI
Second DefendantGRACE REPILING AND RELEVELING LIMITED (IN LIQUIDATION)
Third DefendantAUCKLAND COUNCIL
Fourth DefendantMICHAEL PERCY FIELD
First Third Party
Hearing: 28 April 2021 Appearances:
James Burt for the Plaintiff
Ray Parmenter for the First and Second Defendants Amy Davison for the Fourth Defendant
No appearance for the First Third Party
Judgment:
2 June 2021
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 2 June 2020 at 4:00pm
pursuant to Rule 11.5 of the High Court Rules
………………………….
Registrar/Deputy Registrar
HUM HOSPITALITY LIMITED v STYLO MEDICAL SERVICES LIMITED [2021] NZHC 1287 [2 June 2021]
[1] Applications for security for costs are not common in building defects cases but this is not a run-of-the-mill case. The building is a two-storeyed villa, more than 100 years old, on the Grafton side of Grafton Bridge. Hum Hospitality Ltd, the plaintiff, acknowledges that the property has been in substantial disrepair and that the defendants are not responsible for all its defects. Hum no longer has an interest in the property. It describes itself as carrying on a social enterprise concerned with serving the community.
[2] Stylo Medical Services Ltd, the first defendant, has owned the property throughout. Dr Ooi, the second defendant, is its director. Stylo leased the property to Hum but the lease has now been cancelled.
[3] The third defendant, a re-piling company, is in liquidation. Mr Field, the first third party is its director.
[4] The Auckland Council, the fourth defendant, is sued as successor to the Auckland City Council for regulatory responsibilities under the Building Act 2004.
[5] The close of pleadings date was 17 May 2021. The case has a fixture for three weeks beginning 27 September 2021. There are two applications for security, one by Stylo and Dr Ooi and the other by the council. Both were filed in December 2020.
[6] There is reason to believe that Hum will not be able to pay the defendants’ costs if it fails. Its misrepresentation claims against Stylo and Dr Ooi are weak. Notwithstanding that, I do not order security for costs for them as they delayed in applying and Hum has some prospects of success on its other cause of action against Stylo. On the other hand, I order security for the Auckland Council. While it applied late, it is not guilty of delay in the same way as Stylo and Dr Ooi. Hum’s case against the council is difficult because of a limitation defence.
[7] Stylo had not owned the property for all that long when Dr Ooi had re-piling and re-levelling done in 2009 by Grace Repiling. The Auckland City Council issued a building consent, inspected the work and issued a code of compliance certificate in September 2009.
[8] In late 2010, Stylo listed the property with land agents for leasing. This led to Stylo leasing the property to Hum under a deed of lease dated 22 January 2011. The term was six years beginning 1 February 2011, with two rights of renewal of eight years each. Hum had a rent-free holiday for the first three years but was responsible for paying all outgoings. In return for the rent holiday, Hum was to carry out fitout work on the property. The value of the work was considered to be about $350,000. Hum alleges that Stylo misrepresented the work that Dr Ooi had had carried out in 2009, giving assurances that the foundations and substructure had been repaired, re- piling and re-levelling of the property had been done, and there was a code of compliance certificate including for remedial work on the upper deck. All the work complied with the building code.
[9] Hum’s case is that it took the lease relying on those representations. It has carried out work on the property costing more than $650,000. It began restoration work in February 2012. On the upper deck it found defects, including rotten supporting timbers. There was serious structural rot on a corner beam. The upper deck had to be removed completely and replaced, including the major structural supports. In January 2013, after a heavy storm, the lower deck buckled and the flooring moved out of position. Since then it has found that significant areas of the house had not been re-piled or re-levelled, and the re-piling and re-levelling work was sub-standard and did not comply with the Building Code or the Building Act. It accordingly says that the representations were not true. It has not been able to complete repairs, nor finish the fitout either to use the property as a residence or for its proposed commercial activity, including a restaurant. Substantial remedial work will be required.
[10] Hum began this proceeding in April 2016. At first, Stylo was the only defendant. The other defendants were added under Gordon J’s decision of November 2018.1
[11] In its amended statement of claim of 5 December 2018, Hum sues Stylo for contractual misrepresentation under s 35 of the Contract and Commercial Law Act 2017. It also sues for breach of the covenant for quiet enjoyment, alleging conduct by Dr Ooi directed at disrupting Hum’s enjoyment of the property, including harassment. Hum sues Dr Ooi for negligent misstatement for the alleged misrepresentations leading to the lease of the property. Hum sues Grace Repiling in negligence, but that is stayed, because the company is in liquidation. Hum sues the Auckland Council in negligence, for alleged negligence in inspecting the work in 2009, and in negligent misstatement, for issuing the code of compliance certificate upon which Hum relied.
[12] Hum’s director, Ms Armitage, says that the damages claimed for the defects are more than $3 million:
(a) Costs to remediate damage because of house movement $128,925.00 (b)
Commercial loss through not having made a return on the investment
$1,371,350.00
(c)
Rent charge on the basis that the foundations had been done as opposed to appropriate market rent, rent actually paid up to 2019 (whereas the appropriate market rent would have been
$312,000.00 – a loss of $310,000)
$622,000.00
(d)
Interest on costs of loans to subsidise rent
(and also lost potential earnings at $65,000 a year from the time of the lease to 2019)
$61,000.00 ($585,000.00)
[13] As may be gathered from Hum’s cause of action against Stylo for breach of the covenant for quiet enjoyment, relations between Stylo and Hum have not run smoothly. This case is not the only litigation. There have been lots of cases.2
1 Hum Hospitality Ltd v Stylo Medical Services Ltd [2018] NZHC 2971.
2 Stylo Medical Services Ltd v Hum Hospitality Ltd [2013] NZHC 2114; Stylo Medical Services Ltd v Hum Hospitality Ltd [2014] NZHC 1587; Stylo Medical Services Ltd v Hum Hospitality Ltd [2014] NZHC 2723; Stylo Medical Services Ltd v Hum Hospitality Ltd [2014] NZHC 2428; Stylo Medical Services Ltd v Hum Hospitality Ltd [2014] NZHC 2029; Stylo Medical Services Ltd v Hum Hospitality Ltd [2015] NZCA 405; Stylo Medical Services Ltd v Hum Hospitality Ltd [2015] NZHC 1150; Stylo Medical Services Ltd v Hum Hospitality Ltd [2015] NZHC 2297; Stylo
Most concern failures by Hum to pay rent on time, and Hum’s applications for relief when Stylo has sought to cancel the lease, but they also included other matters – allegations by Stylo that Hum had not complied with covenants in the lease, and relief against a failure to give notice renewing the lease.
[14] While the decisions show defaults by Hum in paying rent, it was usually successful in claiming relief against cancellation and remained a lessee in possession of the premises. It says it paid costs ordered against it. That, however, changed in 2020. Having found that a rent dispute could not be referred to arbitration,3 Brewer J held that Hum was in arrears by at least $150,000.4 He ordered Hum to pay $150,000 within a month of his decision and gave directions to decide how much more was due for rent, interest and operating expenses. Hum did pay the $150,000 but not in time. In a minute of 11 February 2021, Brewer J granted possession of the premises to Stylo. Hum has applied to the Court of Appeal for leave to appeal out of time. Brewer J granted interim relief pending the appeal.5 Hum is still occupying the premises on conditions that it pay current rent and outgoings. The Court of Appeal has not yet given its decision on Hum’s application for an extension of time to appeal.
Is there reason to believe that Hum Hospitality Ltd will be unable to pay the defendants’ costs if Hum fails at trial?
[15] While Hum is a company, it does not run a normal commercial business. It says that it and Falling Apple Charitable Trust together form a social enterprise concerned with serving the community. The trust is registered under the Charitable Trusts Act 1957. Hum undertakes the business activities to support the work of the trust. Together, they work to promote culture, art, music, education, health, sustainability and well-being in the community. The social enterprise is run by
Medical Services Ltd v Hum Hospitality Ltd [2016] NZHC 804; Hum Hospitality Ltd v Stylo Medical Services Ltd [2016] NZHC 1418; Hum Hospitality Ltd v Stylo Medical Services Ltd [2016] NZHC 1849; Hum Hospitality Ltd v Stylo Medical Services Ltd [2016] NZHC 1867; Hum Hospitality Ltd v Stylo Medical Services Ltd [2016] NZHC 2295; Hum Hospitality Ltd v Stylo Medical Services Ltd [2016] NZHC 2466; Hum Hospitality Ltd v Stylo Medical Services Ltd [2018] NZHC 642; Stylo Medical Services Ltd v Hum Hospitality Ltd [2018] NZHC 1252; Stylo Medical Services Ltd v Hum Hospitality Ltd [2020] NZHC 499; Stylo Medical Services Ltd v Hum Hospitality Ltd [2020] NZHC 2969; Stylo Medical Services Ltd v Hum Hospitality Ltd [2021] NZHC 772.
3 Stylo Medical Services Ltd v Hum Hospitality Ltd [2020] NZHC 499.
4 Stylo Medical Services Ltd v Hum Hospitality Ltd [2020] NZHC 2969.
5 Stylo Medical Services Ltd v Hum Hospitality Ltd [2021] NZHC 772.
volunteers and money raised goes back to serving the community. Hum earns some income from rent. Hum’s director, Ms Armitage, says that the villa offers long-term residence upstairs, and the downstairs space is a coffee-shop. There is also a coffee hut out the front. The two front rooms are used by the community.
[16] Hum has not provided any financial statements, management accounts or cash- flow projections. Its case is that, on way or another, it has always managed to meet its liabilities. Even if it has fallen into default in the past in paying rent, it has made good the arrears and also paid costs whenever they have been ordered. It relies on fundraising activities, the kindness of volunteers and the philanthropy of donors. It has managed to get by. The court can accordingly be confident that it will meet any orders for costs if it does fail at trial.
[17] Stylo notes that while Hum paid the $150,000 rent ordered by Brewer J, that was borrowed funds. Hum still has an ongoing liability for $150,000, albeit to a different creditor. Stylo says that as well as the $150,000 paid, Hum also owes it a further $95,000 in arrears of rent and operating expenses. Hum is required to pay monthly rent of $11,500 as a condition of the interim relief granted by Brewer J. Stylo also says that Hum owes it costs of $24,430 on the cancellation proceeding and $3,396 on the application for interim relief.
[18]In an affidavit of 7 December 2020, Ms Armitage, Hum’s director, said:
43. Hum is in poor financial health. This has been caused, in part, by matters at issue in the Hum proceeding …
…
45. It is only after the repairs and refurbishment that Hum expects to see a return on its investment, a benefit for all the years of investment and loss.
…
48. Notwithstanding the importance of the villa itself, Hum is also reliant on funds generated from the villa to pursue the Hum proceeding. …
…
54. In the past, Hum has raised emergency funds by way of art auctions, events, and loans. Hum’s ability to generate income on an urgent basis has been hampered by the COVID-19 pandemic. Previous donors are facing similar financial strain.
…
59. In the absence of any urgently sourced funds Hum will face liquidation and I am faced with bankruptcy if the judgment is enforced.
..
90. Due to the state of the foundations, I have been unable to bring the villa into a state capable of generating profit. We have had to rely on the residential use of the site to meet our lease obligations. …
[19] An affidavit for the Auckland Council notes that Hum advertised for a flatmate for the property at a rent of $200 per week. The council suggests that the people living in the property could generate rent of $83,200 a year, which is not enough to meet the annual rent of $120,000 (plus GST). In response Ms Armitage says that the property earns a regular weekly income of $2,595 from rent. She also expects the café to earn about $300 a week. Even so, I accept the council’s submission that Hum must pay Stylo annual rent of $138,000 as well as other outgoings including rates and operating expenses. There is still a shortfall.
[20] Hum’s position is precarious. Its lease has been cancelled. It has no more than temporary use of the premises pending its appeal. A common result of appeals is that the first instance decision is upheld. No one submitted that Hum was bound to succeed on its appeal. It is therefore reasonable to assess the application for security for costs on the assumption that the cancellation of the lease will likely be upheld. With that, Hum will no longer have a business or income. There was no suggestion that it would be able to relocate its community enterprise. While Hum has got by in the past by fundraising, once it is no longer in the property in Grafton, it will have far less ability to raise funds. Given this bleak outlook, it has not provided any reassuring evidence that it will have funds to pay costs to successful defendants. Accordingly, there is reason to believe that it will be unable to pay the defendants’ costs if they succeed at trial.
Exercise of the discretion
[21] As the defendants have got past the threshold for ordering security, the next matter is the discretion under r 5.45(2) of the High Court Rules 2016 whether it is just in all the circumstances to order security. The discretion is exercised according to the
principles summarised in AS McLachlan Ltd v MEL Network Ltd,6 and also bearing in mind the factors set out by Kós J in Highgate on Broadway Ltd v Devine.7 But it is also helpful to bear in mind William Young J’s statement in Reekie v Attorney- General:8
The jurisdiction to require security poses something of a conundrum for the courts. The poorer the plaintiff, the more exposed the defendant is as to costs and the greater the apparent justification for security. But, as well, the poorer the plaintiff the less likely it is that security will be able to be provided and thus the greater the risk of a worthy claim being stifled.
He said that judges are slow to make an order for security which will stifle a claim.9
[22] In assessing whether it is just in all the circumstances of the case to order security, some assessment of the merits of the plaintiff’s case is required. Here the parties have, quite properly, not given extensive evidence as to the merits. The other main consideration is the timing of the applications.
Hum’s claims against Stylo
AThe misrepresentation claim
[23] For Stylo, Mr Parmenter submitted that Hum had a very real difficulty with its misrepresentation claim. He referred to clause 48.7 of the lease:
48.7 For the sake of clarity the tenant acknowledge that the premises are currently in a very poor condition. The landlord leases the premises to the tenant as it is. The landlord gives no guarantee as to whether the premises are fit for the business use of the tenant. The landlord does not warrant the soundness of the structure, the fitout or the services of the premises either. The tenant will do all the work necessary to make the premises fit for the tenant’s business use and to comply with the requirements of law and local authority. The tenant will not require the landlord to do any work or contribute to any work that is required for the premises to be used for the tenant’s business use or to comply with the requirements of law or the local authority.
6 AS McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA) at [15] and [16].
7 Highgate on Broadway v Devine [2012] NZHC 2288, [2013] NZAR 1017.
8 Reekie v Attorney-General [2014] NZSC 63, [2014] 1 NZLR 737 at [2].
9 At [3].
[24]In one of the decisions where the court ordered relief against cancellation,
Whata J said:10
[27] I am unable to reconcile this background, including clause 48.7 with Stylo’s purported reliance on pre-lease representations by Stylo as to fitness of the building. Quite plainly Stylo sought to shift the risk that the premises were not in fact fit for purpose to Hum. Quite plainly Hum assumed that risk. While it is not necessary for me to decide the point with finality at this juncture, to illustrate the mountain that Hum must climb I draw on the following observation of the Court of Appeal in PAE (New Zealand) Ltd v Brosnahan:11
The parties were agreeing, in unequivocal terms at PAE’s instigation, that what the directors had said and done before the agreement no longer mattered. Effectively, they drew down the curtain of liability, excluding from it all preceding conduct. By this means, they also broke the chain of causation. …
[28] By parity of reasoning, clause 12.7 of the agreement to lease and then clause 48.7 of the lease drew down the curtain of liability for preceding conduct.
[25] For Hum, it was submitted that PAE (New Zealand) Ltd v Brosnahan involved a contract with an “entire agreement” clause, whereas the current lease does not have such a provision. But that does not get around cl 48.7. Hum’s claim is for contractual misrepresentation. The clause expressly says that the tenant takes the premises as they are, without the landlord giving any warranty as to fitness for purpose or soundness of structure, fitout or services. A misrepresentation claim will not succeed if the party alleging misrepresentation entered into the contract knowing the truth. Here, the clause informs the tenant that the premises are in a very poor condition and Hum has acknowledged that. Some of the damages claimed by Hum are to go towards the costs of remedial work, but Hum undertook not to look to Stylo to contribute towards any work. I agree with Whata J that the clause is a major obstacle for Hum’s misrepresentation claim. It may be decisive.
[26] In response it was pointed out that Stylo had not applied to strike out the misrepresentation claim and therefore it may be inferred that Stylo must recognise that there is some force in the misrepresentation claim. It cannot therefore be discounted so easily. But not applying for strike-out does not count against Stylo. It is a legitimate
10 Stylo Medical Services Ltd v Hum Hospitality Ltd [2014] NZHC 2428 at [27].
11 PAE (New Zealand) Ltd v Brosnahan [2009] NZCA 611, (2010) 9 NZBLC 102,862 at [46].
litigation tactic not to apply for strike-out, but to leave matters for trial. Strike-out applications are not always successful and Stylo had been unsuccessful in many of its cases against Hum. The point remains that Hum’s claim for contractual misrepresentation is weak.
BThe claim for breach of the quiet enjoyment covenant
[27] The lease has a standard “quiet enjoyment” covenant. Hum alleges that Stylo deliberately interfered with Hum’s business operations, damaged its reputation and reduced community support. The actions are said to include discouraging sponsors, business partners and other supporters from supporting Hum; publishing confidential information about Hum and misrepresenting that information; making false and misleading statements about Hum; and making false complaints to the Auckland Council.
[28] Particulars about those contacted by Dr Ooi are given. He is alleged to have tried to have insurance cover for the building cancelled. He used social media to publish defamatory statements about Hum and its director. Particulars are given of alleged false complaints he made to the Auckland Council about Hum. He is also said to have harassed Hum by making unannounced frequent visits. He is alleged to have been volatile and threatening and to have made harassing phone calls to Hum. The relief sought incudes an injunction and damages, although the damages are not quantified. An affidavit by Ms Armitage in an earlier proceeding gives examples of Dr Ooi’s conduct.12
[29] Stylo disputes these claims, but also belittles the cause of action. It says: “What could the damages be?” It tries to sideline the cause of action by saying that it is irrelevant.
[30] The cause of action is still available, notwithstanding cancellation of the lease. Damages may still be awarded for past breaches. If Hum can show that Stylo’s actions disrupted its business, damages may be given to make amends for any losses. Success
12 Affidavit of 3 August 2015 in CIV 2013-404-4995.
on the cause of action will bring an entitlement to costs, even if the damages may not be as much as Hum has claimed for its first cause of action.
[31] The issue may be whether the actions of Dr Ooi did amount to breaches of the covenant. The covenant for quiet possession means that the tenant’s lawful possession of the property will not be substantially interfered with by the acts of the lessor or those lawfully claiming under them.13 The covenant requires the landlord not to interfere with the tenant’s possession of the premises. Hinde McMorland and Sim give examples of a landlord’s breach of the covenant:14
…removal of doors and windows of the premises in an attempt to force the lessee to leave;15 cutting off the supplies of gas and electricity to the premises with the object of inducing the lessee to quit;16 deliberate and persistent attempts to drive the lessee out of her possession of the premises by persecution and intimidation, including threats of physical eviction of the lessee and removal of her belongings;17 disruption to the business of the lessee by demolishing or redeveloping part of the building of which the lessee’s shop premises form a part;18… allowing adjacent premises to be used by another lessee for a purpose that is incompatible with, or causes a nuisance to, the lessee;19…
There does not need to be direct physical interference with the lessee’s possession and enjoyment.
[32] While Hum’s pleading of the incidents said to be in breach of the covenant are sufficiently particularised to make them apparently plausible, there is nothing from Stylo to refute them. Some of the matters alleged might be no more than the actions of a landlord legitimately protecting its own interests under the lease. But on the information given so far it seems unlikely that Stylo will escape liability altogether. The prospect of Hum failing on the second cause of action does not look high. Stylo has not shown that it has a strong defence to the claim for breach of quiet enjoyment in the same way that it has for the misrepresentation claim.
13 Southwark London Borough Council v Mills [2001] 1 AC 1 (HL) at 10.
14 Jason Goodall (ed) Hinde McMorland & Sim Land Law in New Zealand (online ed, LexisNexis) at [11.065].
15 Lavender v Betts [1942] 2 All ER 72.
16 Perera v Vandiyar [1953] 1 WLR 672, [1953] 1 All ER 1109 (CA).
17 Kenny v Preen [1963] 1 QB 499, [1962] 3 All ER 814 (CA).
18 Kalmac Property Consultants Ltd v Delicious Foods Ltd [1974] 2 NZLR 631 (CA).
19 Nordern v Blueport Enterprises Ltd [1996] 3 NZLR 450.
[33] Success for Hum on the claim for breach of the quiet enjoyment covenant is relevant to fixing security for costs. The court may treat the cause of action separately for costs. The causes of action are distinct. Costs awarded to Stylo for succeeding on the misrepresentation claim may be considerable, given the detailed evidence, expenses of experts, and extended hearing times required for that claim as opposed to the claim for breach of the quiet enjoyment covenant. While the damages awarded for breach of the quiet enjoyment covenant may not be as great as those sought for the misrepresentation claim, the damages and costs for succeeding on that cause of action may still be enough to offset costs to Stylo for successfully defending the misrepresentation claim. That reduces the risk to Stylo of not being paid costs, even if it successfully defends the misrepresentation claim.
[34] It is possible that Hum will fail in its quiet enjoyment claim as well as its misrepresentation claim, but I do not regard that risk as significant. There are reasonable prospects that Stylo will not be left out of pocket for costs.
Delay by Stylo and Dr Ooi in applying for security for costs
[35] Delay in applying for security is relevant. It may be unfair to a plaintiff who has invested time, effort and funds in a proceeding to be stymied by a late application for security for costs. In Jo v Johnston Associate Judge Osborne said that relevant considerations include:20
(a)whether the application was made as soon as the defendant became aware, or could with reasonable inquiry have become aware, of the plaintiff’s likely inability to meet costs;
(b)whether there has been needless delay in the application, particularly if it was designed to prejudice the plaintiff; and
(c)whether and if so to what extent the delay has prejudiced the plaintiff, such as where a plaintiff has expended substantial sums to bring a proceeding to the brink of trial.
20 Jo v Johnston [2013] NZHC 552 at [19].
[36] Stylo applied for security for costs on 21 December 2020. The case had been running since April 2016. It had been set down for hearing in August 2020, but that was vacated. Dates had been set by which any interlocutory applications were to be filed, but these were extended by consent. The application was within time.
[37] Stylo has been aware for a long time that Hum has difficulties paying its debts. In her decision of 20 August 2013, during the rent holiday, Ellis J said:21
Dr Ooi quite fairly has an ancillary concern about Hum’s ability to meet the rental payments at that time.
[38] In 2018, Hum applied to join further defendants. In opposition, Stylo submitted that all defendants would apply for security for costs which Hum would not be able to meet.22 Gordon J did not consider that was relevant to her decision.23 Nevertheless, her decision shows that Stylo was aware that Hum’s precarious financial position would affect its ability to meet an order for costs and that Stylo could protect itself by applying for security. Stylo could have applied for security then but did not.
[39] Stylo says that it did not apply for security earlier because in other cases, where it had tried to cancel the lease for non-payment of rent, Hum had generally been successful and had obtained relief against cancellation. It was therefore not confident that security would be ordered, even though it considered that there were good grounds to fear that Hum would not be able to pay costs. That explanation only takes it so far. The point remains that at least since 2018 if not earlier, Stylo has been aware that Hum has trouble meeting its commitments, and that an order for costs against Hum in a building defects case (with a two to three week hearing) will be substantial. The delay counts against Stylo’s application.
[40] To meet the delay objection, Stylo says that Hum’s lawyers have been working on a pro bono basis and therefore it has not incurred the same costs as a party who had paid their lawyers. Nevertheless, Hum will have incurred other expenses on the litigation, including experts.
21 Stylo Medical Services Ltd v Hum Hospitality Ltd [2013] NZHC 2114 at [26].
22 Hum Hospitality Ltd v Stylo Medical Services Ltd [2018] NZHC 2971 at [35](f).
23 At [68].
[41] Stylo also proposes that the security for costs be prospective only, that is, Hum should put up security only for costs awarded for steps taken after the court orders security. But the application has still come late and Hum stands to be prejudiced by being required to put up any security now.
[42] In summary, Hum’s misrepresentation claim has real difficulties because of cl 48.7 of the lease. It is very likely it may be ordered to pay significant costs on the misrepresentation claim. But, against that, the risk of Stylo not being paid is not that high, as damages and costs to Hum on its claim for breach of the quiet enjoyment covenant may be set off against its liability for costs on the misrepresentation claim. As well, Stylo’s delay in applying for security counts against it. In the circumstances, I decline to order security for costs in favour of Stylo.
Dr Ooi’s application for security for costs
[43] Dr Ooi and Stylo are represented by the same lawyers and are running a common defence. Hum’s claim against Dr Ooi is for negligent misstatement. That is a claim in tort, not a claim for contractual misrepresentation. Dr Ooi is not sued personally for breach of the covenant for quiet possession. On the basis of Body Corporate 202254 v Taylor,24 Hum may have a case that when Dr Ooi personally made any representations alleged by Hum, he assumed responsibility to Hum for the accuracy of his statements. Nevertheless, Dr Ooi may be able to use cl 48.7 of the lease in defence. It is evidence that Hum took the lease knowing that the premises were in a poor state of repair.
[44] The outcome that Dr Ooi fears is that although he may succeed in his defence and obtain a substantial costs award, the order may be barren. He is not sued for breach of the quiet enjoyment covenant and therefore will not be under any countervailing liability to Hum. But that pre-supposes that Stylo’s liability for damages and costs for breach of the quiet enjoyment covenant cannot be used to satisfy Hum’s liability for costs to Dr Ooi, because there is no mutuality. The general rule is that for set off, each party should be debtor and creditor in the same capacities.25
24 Body Corporate 202254 v Taylor [2008] NZCA 317, [2009] 2 NZLR 17.
25 Hamilton Ice Arena Ltd v Perry Developments Ltd [2002] 1 NZLR 309 (CA).
Mutuality is not, however, an invariable requirement for equitable set off. In Hamilton Ice Arena Ltd v Perry Developments Ltd the Court of Appeal left open the possibility that in some unusual circumstances it might be appropriate to allow equitable set-off where there is no identity of parties. Derham26 cites cases where equitable set-off has been allowed, even without mutuality.27 As an example, in Ex parte Hanson joint debtors were sued. One of them had a separate claim against a creditor. Mutuality was missing but equitable set-off was allowed. Other cases are in similar vein. A common element is that the party sued is alleging that it has a claim affecting the other side, even if there is no mutuality.
[45] Those considerations are likely to come into play when the court considers costs on Hum failing against Dr Ooi. He would not have a separate order for costs because he has defended jointly with Stylo.28 Given the close association between Dr Ooi and Stylo (he has control of the company), the court would allow equitable set- off to be applied in line with the cases cited by Derham. Damages and costs awarded to Hum for breach of the quiet enjoyment covenant would also be applied to reduce any costs liability to Dr Ooi.
[46] Dr Ooi was joined as a defendant under Gordon J’s decision of November 2018. He has had ever since then to apply for security for costs. Stylo’s knowledge of Hum’s financial difficulties is also his knowledge. The delay also counts against him.
[47] Accordingly, because of Dr Ooi’s delay and because he is unlikely to obtain a barren costs order, Hum should not be ordered to provide security for costs for him.
Auckland Council
[48] An amended statement of claim, with Auckland Council named as a defendant, was filed on 5 December 2018. The claims against the council are conventional ones
26 Rory Derham Derham on the Law of Set-Off (4th ed, Oxford University Press, Oxford, 2010) at 4.67-4.81.
27 Vulliamy v Noble (1817) 3 Mer 593; Ex parte Hanson (1811) 18 Des Jem 232; Clarkson and Smith v Goldberg [1926] 1 DLR 509 (Ontario Court of Appeal); Baillie v Edwards (1848) 2 HLC 724 (HL); Hamp v Jones (1840) 9 LJ Ch 258; Sovereign Life Assurance Company v Dodd [1892] 2 QB 573.
28 High Court Rules 2016, r 14.15.
made against a local authority for alleged negligence in inspecting building work and issuing a code compliance certificate. The council did not apply for security for costs until December 2020.
[49] The Auckland Council denies that it owed a duty of care to Hum, which is no more than a lessee. It is well established that a local authority carrying out its functions under the Building Act 2004, may owe a duty of care not only to the immediate registered proprietor of a property but also to subsequent owners. There is no reason why the duty should be restricted to owners of a freehold estate, as opposed to the owner of a leasehold estate. In both cases, the owners have a relevant interest in the property if there is damage to the property as a result of negligence of a third party. The extent of the claim of the owner of a leasehold estate may be limited because the term of their interest is also limited, but that does not negate the duty of care.
[50] The council also submitted that it had not been negligent, because it had been asked to give a building consent only for residential use of the villa, as opposed to commercial use. The code compliance certificate was likewise limited. There is, however, no evidence on the point at this stage. That is an issue for trial.
[51] With the cancellation of the lease, Hum’s damages may be much less than it has claimed. But that affects only the extent of any relief. In this regard, Mr Burt pointed out that a large part of its claim is for financial losses, loss of earnings before cancellation of the lease, income which the company would otherwise have received but for the defendants’ negligence.
[52] The council did, however, raise one significant defence, limitation. The acts or omissions of the council were all no later than 24 September 2009 when the council issued its code compliance certificate. Accordingly, the limitation question is governed by the Limitation Act 1950, not the Limitation Act 2010.29 The limitation period is six years from the accrual of the cause of action.30 In building defects cases,
29 Limitation Act 1950, s 2A; Limitation Act 2010, ss 59 and 61; Building Act 2004, s 393(1). The council does not rely on the ten-year longstop under s 393(2), but says that the claim is already time-barred.
30 Limitation Act 1950, s 4(1)(a).
there is a discoverability test to fix when the cause of action accrues. In Invercargill City Council v Hamlin, the Privy Council said:31
… the cause of action accrued when the cracks become so bad, or the defects so obvious, that any reasonable homeowner would call in an expert. Since the defects would then be obvious to a potential buyer, or his expert, that marks the moment when the market value of the building is depreciated, and therefore the moment when the economic loss occurs.
So the issue is whether the damage for which Hum sues the council was discoverable within the six years before the council was sued, that is, from 6 December 2012.
[53] The council has put in evidence three emails of Ms Armitage, all sent before 6 December 2012:
(a)An email dated 21 June 2012 to Dr Ooi:
The top corner deck structural beam has shifted 45ml from its secure place. This is no doubt a result of repiling the house. This is also the same for the back top deck structural beam. We will have to use a cargo hoist to pull the entire deck in – back to its resting spot.
(b)An email of 22 June 2012 to Dr Ooi:
I have enlisted a Project Manager, Peter Arthur, who will be working alongside me to Project Manage. He is involved with the council on a number of things and he has already begun work. He will be bringing independent resources which will be combined with ours, including builders engineer etc. I have made this decision so we can streamline the building process both now and after Building consent and get the project finished faster. There is a lot more issues with the house than expected due to the repiling and rot, his resources and expertise will help remedy this this in an efficient and effective manner. I would like you to meet him in the near future.
(c)An email of 31 October 2012 to a council officer which says, in part:
As a follow-up to our conversation, I wanted to ask about the difficulties that arise around the restoration of the heritage villa such as the one at 123 Grafton Road that lay derelict for eight years prior to us taking the property. Given that we’ve
31 Invercargill City Council v Hamlin [1996] 1 NZLR 513 (PC) at 526, followed in Trustees Executors Ltd v Murray [2007] NZSC 27, [2007] 3 NZLR 721.
had many unexpected situations to deal with including rot, deck structural issues, the gradient of the house being out of whack due to repiling, and many other things. Can you please lay out in your experience the difficulties that come with dealing with a heritage house of this nature including consultation with Council, replacement of things to heritage specs etc.
[54] In the council’s submission, these emails show that Ms Armitage was aware of problems with the repiling work, and that she had to call in outside people experienced in building work for assistance in dealing with the problem. She had discovered the problems with the repiling work. In response, Mr Burt submitted that the emails were not as unequivocal as the council maintained. In my judgment, the council has shown strong support for its limitation defence. At present Hum has not shown a clear way around that defence. So the limitation defence has good prospects of success. There are similar prospects that an order for costs may be barren.
[55] In my experience in building defects litigation, councils do not normally apply for security for costs. That is understandable and not to be criticised. Usually, those suing them own a property, an asset which can be used as security for funds to meet any liabilities for costs. If the plaintiffs are financially distressed, it may often be because of costs they have incurred in having to deal with defects. But that is not to say that public authorities cannot apply for security. In Reefdale Investments Ltd v Commissioner of Inland Revenue,32 Mackenzie J rejected a submission that the Commissioner of Inland Revenue could not apply for security for costs. Very often public authorities know little about the financial circumstances of those suing them. The Auckland Council would not ordinarily be suspicious of Hum’s ability to meet an order for costs.
[56] The arguments about delay, that weighed in considering the application by Stylo and Dr Ooi, do not apply so strongly in the case of the Auckland Council. The witnesses for the Auckland Council say that they only became properly aware of Hum’s financial difficulties towards the end of 2020 with the judgment of Brewer J of November 2020 requiring Hum to pay Stylo $150,000.
Reefdale Investments Ltd v Commissioner of Inland Revenue (2004) 17 PRNZ 229. See also
DT United Kingdom Ltd v Commissioner of Inland Revenue (2010) 24 NZTC 24,369 (HC).
[57] In my judgment, Hum should provide security for the Auckland Council in light of the apparent weakness of its claim because of the limitation defence. All the same, the application for security for costs comes at a difficult time. The application was heard shortly before the close of pleadings date, and this judgment is being given after that date.
[58] The Auckland Council calculated 2B costs from the start of the defence through to the completion of trial at over $100,000. On my calculations, scale costs for steps taken only from now through to the completion of the hearing are likely to be in the order of $90,000, excluding disbursements and witnesses’ fees, which are likely to be substantial.
[59] Some discounting is appropriate, if only as recognition that Hum’s case is not completely hopeless. I fix the security for costs at $50,000.
[60] Normally when security is ordered, the proceeding is stayed. But when the trial is so close to hand, it would not be appropriate to order an immediate stay. If Hum is to be able to take its case through to trial, it should be given a proper opportunity to raise the funds. If the stay were applied now, it would be necessary to vacate the trial. That should be avoided if at all possible. A fixture for the case has already been vacated once already, and further delay should be avoided.
[61]Accordingly, I fix the security for costs payable for the Auckland Council at
$50,000 and direct that it be paid no later than 9 July 2021. If the security is not paid by that date, any party may request a conference immediately for further directions. The directions may include a stay of the proceeding against the council. Other options are also available.
Outcome
[62]I dismiss Stylo’s and Dr Ooi’s security for costs application.
[63]Stylo and Dr Ooi are to pay Hum costs on their security for costs application.
[64] On the council’s application I order Hum to pay security for costs of $50,000. If that sum is not paid by 9 July 2021, any party may ask for a face-to-face conference for further directions.
[65]Hum is to pay the Auckland Council costs on its security for costs application.
[66] If counsel cannot agree costs, memoranda may be filed and I will decide costs on the papers.
[67]Leave is reserved to apply for further directions.
[68] The parties will need to continue preparing for hearing in the meantime. That follows from the security for costs applications having been brought late.
…………………………………….
Associate Judge R M Bell
Solicitors:
Lowndes Jordan, Auckland, for the Plaintiff
Winston Wang, Auckland, for the First and Second Defendants Rice Speir (Helen Rice), Auckland, for the Fourth Defendant
Copy for:
James Burt, Auckland, for the PlaintiffRay Parmenter, Auckland, for the First and Second Defendants M P Field (First Third Party)
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