Jeffreys v Morgenstern

[2013] NZHC 1361

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-008432 [2013] NZHC 1361

BETWEEN	STEPHANIE BETH JEFFREYS and TIMOTHY WILSON DOWNES Plaintiffs
AND	ARTHUR SYLVAN MORGENSTERN First Defendant
AND	TANYA MAY LAVAS Second Defendant

Hearing:	10 June 2013
Appearances:	K Wakelin for Plaintiffs T Joseph for Defendants
Judgment:	10 June 2013

ORAL COSTS JUDGMENT OF VENNING J

Solicitors:           Meredith Connell, Auckland

Gilbert Walker, Auckland

JEFFREYS & ANOR v MORGENSTERN & ANOR [2013] NZHC 1361 [10 June 2013]

Introduction

[1]      This is the plaintiffs’ application for costs following the adjournment of a fixture.  The plaintiffs seek costs of the application and hearing which led to the adjournment, wasted costs which they say arose out of the vacation of the fixture and the costs of this application.

[2]      The defendants submit no order for costs should be made in the plaintiffs’ favour.  Alternatively, they submit that any such order should be considered by the trial Judge following the trial.  They seek the costs of defending this application for costs.

Background – General

[3]      It is necessary to put the application in context by providing some brief background.

[4]      The plaintiffs are liquidators of a number of companies of which the first defendant was a director. The second defendant is the first defendant’s wife.

[5]      The plaintiffs’ claim alleges breaches of directors’ duties, in particular in relation to three transactions:  a rental underwrite;  a car parking deed;  and a share sale.

[6]      I interpolate here that I accept the submission made for the plaintiffs that prosecuting  a  directors’ duties  case  presents  particular  challenges  to  liquidators. They have no firsthand knowledge of what took place in the period prior to liquidation.  The defendant directors are the ones who have that firsthand knowledge The liquidators are therefore required to gather evidence about what took place, piece the evidence together and based upon that, consider what, if any, action should be taken, including legal proceedings in order to gain a recovery for creditors.  For that reason full and faithful compliance of discovery obligations are of particular importance.

Procedural background

[7]      It is necessary also to briefly refer to the procedural background of this case.

[8]      The Court made timetable orders directing lists of documents to be filed and served by 18 May 2011 with inspection to be completed by 8 June 2011.  Neither party complied with the direction.  The parties, however, agreed to a deferral of the timetable by one week.  The plaintiffs complied with that agreed deferral, filing and serving their affidavit documents on 25 May 2011.  The defendants breached the agreed extension but filed and served their affidavit of documents on 29 July 2011. The defendants then filed a further supplementary affidavit of documents on 14

October 2011.

[9]      The setting down date for the proceeding, (now the close of pleadings date) was 1 November 2012.  It is submitted for the defendants that the setting down date was actually 5 December 2012.   It appears the difference arises out of incorrect advice given by the Registry as to the date.  In any event nothing turns on it because the material events occurred well after either of those dates.

[10]     Under an agreed timetable which was incorporated into an order of the Court on 26 November 2012 the defendants’ briefs of evidence and index of documents were due to be served by 25 January 2013.

[11]     On 30 January the plaintiffs filed a memorandum seeking directions and/or a telephone conference regarding the defendants’ failure to serve their briefs.  I record counsel had exchanged email correspondence relating to that matter before that memorandum was filed.  I also note that it is not for counsel to vary Court orders by agreement.  If an order cannot to be complied with then the parties should apply to the Court for an extension of time.

[12]     In any event, the matter proceeded to a conference before Wylie J on 31

January 2013.  His Honour issued a minute directing the defendants to serve their briefs of evidence and index of documents as soon as possible and in any event no later than 5.00 pm, 4 February 2013.  The Judge accepted counsels’ advice that the

trial was likely to take less than the eight days scheduled and accordingly deferred the start date of the trial to 20 February 2013.

[13]     On 4 February 2013 the defendants served one brief of evidence and an index of documents.  They advised a further brief would be served shortly.  On 5 February that second brief was served.  Also on 5 February the defendants served a further bundle of documents.   These were documents which had not previously been discovered.  The documents, or at least some of them, were referred to in the defendants’ briefs of evidence.

[14]     The plaintiffs took objection to the inclusion of the previously undiscovered documents and sought a conference for the purpose of determining whether the documents should be excluded as evidence.

[15]   The defendants sought leave of the Court to produce the previously undiscovered  documents.    That  was  met  by  a  memorandum  on  behalf  of  the plaintiffs opposing that course of action and, in the alternative, seeking an adjournment of the fixture.

[16]     The matter came before MacKenzie J on 11 February 2013.   His Honour noted:

It is most regrettable that this situation should have arisen at this very late stage.  Leave to adduce the documents would now be required.  I consider that it is quite inappropriate to grant leave on the basis of the present trial date.  However, given the apparent importance of the documents to the case, it would be less than satisfactory for the case to proceed without the ability for the defendants to refer to those documents.  That inevitably leads to the consequence that the fixture will have to be vacated.

[17]    The Judge then granted leave for the documents to be produced but on conditions.  He reserved the question of costs on the application and of any wasted costs as a result of the adjournment of the fixture.

[18]     After further discussions between counsel this formal application for costs was filed.

[19]     Subsequently  the  defendants  filed  and  served  a  second  supplementary affidavit   of   documents.     The   plaintiffs   for   their   part   also   filed   a   further supplementary list of documents in May 2013.

Decision

[20]     I  reject  the  submission  for  the  defendants  that  this  application  for  costs should either be declined or deferred to follow the outcome of the substantive fixture on the basis that it will only be then that the Court will be able to determine the significance or relevance of the additional documents disclosed by the defendants.  It is appropriate to deal with the application for costs now.  Whatever the ultimate significance of the particular documents in issue, the effect of their very late disclosure by the defendants, is that the fixture for February had to be vacated.  That is clear from the determination of MacKenzie J on that matter.

[21]     The High Court Rules contemplate that costs on interlocutory applications, in this case the adjournment and grant of leave application, be addressed following determination of the particular applications.1    The outcome of the substantive trial will not affect the fact that the trial scheduled for February could not take place because of the defendants’ default in their discovery obligations.

[22]     The defendants’ submission that the application should be dismissed in their favour or that the costs should be reserved is, with respect, unrealistic in the circumstances of this case.

[23]     Further,   the   defendants’  submission   that   it   was   unnecessary   for   the adjournment of the trial because the documents were not that significant or there were not that many of them that were relevant, is an attempt to revisit MacKenzie J’s decision.  That is not open to the defendants at this stage.  It is clear from the terms of MacKenzie J’s decision that the trial was adjourned and the fixture vacated, because leave was granted to the defendants to rely on the documents they had failed

to discover.

1      High Court Rules, r 14.8.

[24]     The defendants next say that costs should effectively lie where they fall on the application because both parties were successful in part, noting the plaintiffs had unsuccessfully opposed the application to adduce that further evidence.

[25]     Although the defendants succeeded on their application for leave to adduce that further evidence, in substance they were granted an indulgence by the Court, despite their default, and the particularly material consequence was that the trial had to be vacated.

[26]     Standing back and looking at that matter overall it is clear that the defendants were granted that indulgence despite their default and their failure to comply with their discovery obligations.  I note it was not the first time that the defendants had failed to comply with orders of the Court.

[27]     In the circumstances it is appropriate that the costs on the applications for leave and adjournment be fixed now and that they be fixed in favour of the plaintiffs.

[28]     I do not overlook that the defendants rely on the fact that the plaintiffs have subsequently filed a further list of documents to submit that costs should be held over or that that factor is relevant to the next issue, that of the wasted costs sought by the plaintiffs.

[29]     The plaintiffs’ response to that submission is that the plaintiffs were not required to disclose the documents because they were not relevant on the pleadings as they stood at the time and further, that to the extent it could be said the documents were relevant, (being solicitor’s advice regarding the prospects of successfully defending a summary judgment application), the advice had been received initially by the first defendant as director and he had himself failed to discover or refer to those documents.

[30]    It is unnecessary for this Court at this time to determine the particular significance of those further documents.  I do acknowledge the force of the plaintiffs’ general submissions on this point but it is a matter which it is unnecessary to determine on this costs application.   The fixture was adjourned and wasted costs

incurred by the plaintiffs because of the defendants’ default.   The other events occurred subsequent to MacKenzie J’s decision to vacate the fixture.  The short point remains that if the defendants had not been in default then the trial would have proceeded on 20 February 2013.

[31]     I turn to consider the issue of wasted costs.  It follows from my discussion above I accept the plaintiffs’ submission that the trial was vacated because of the defendants’ default.  The plaintiffs have inevitably incurred wasted costs as a result of that.  This Court has jurisdiction to make an order for wasted costs.  As this Court has previously observed in the case of Fu Hao Construction Ltd v Landco Albany

Ltd2  default that leads to vacation of fixtures leads to inconvenience and costs not

only to the other parties to that proceedings but to other parties awaiting fixtures in the Court.  Fixtures allocated by this Court are commitments of limited judicial and Court resources.  Time is booked for the case.  Other parties who might otherwise have had their cases allocated hearing time are disadvantaged by default which leads to late vacation of fixtures.

[32]     That is a further reason which supports an award of wasted costs.  The Court should apply sanctions to parties who, through their own default, cause fixtures to be vacated.

[33]     In relation to that it is also significant in this case that the further documents discovered by the defendants directly contradicted the defendants’ earlier answers to interrogatories.  In response to an interrogatory:

Did you receive any professional advice prior to, and in relation to, KDL entering into the Rental Underwrite Deed, whether that advice was obtained on behalf of KDL or any other entity or person (including yourself)?

the first defendant answered “No”.  Despite that, in his witness statement, the first defendant stated:

95.      I therefore disagree  with Mr  Downes’s  statement in  his  brief  of evidence that I did not complete any due diligence, projections or other analysis before committing KDL to the rental underwrite deed.  I always understood, including based on advice from our accountants, that there were

2      Fu Hao Construction Ltd v Landco Albany Ltd HC Auckland CIV-2004-404-006608, 23 May

2008.

sufficient net funds in the project to meet the underwrite if called upon and our projections allowed for the meeting of the underwrite.

The documents discovered supported that position.

[34]     I agree with the approach of Chisholm J in Simpson v Hubbard3 that in cases of this nature, where the Court is required to consider wasted costs, it involves a matter of impression and best judgment of the Court at the time.

[35]     In this case the plaintiffs seek wasted costs for inspection of documents, notice to answer interrogatories, preparation of briefs and preparation of lists of issues, together with wasted expert costs.  They discount the scale time allowance by one-third on each of the above categories.

[36]     In my judgment there is a difference between the inspection of documents and notice to answer interrogatories and the preparation of briefs and preparation of issues and authorities in the common bundle.

[37]     Inspection of documents and the notice to answer interrogatories relate to work done at the very early interlocutory stages of the case.   They have been completed.  To the extent that further such work is required, it would be directed at the further documentation and I reserve leave for the plaintiffs to pursue further costs in relation to such steps following trial.   However, the work done in terms of preparation of briefs and preparation of issues and common bundle for trial is trial focused.   They are costs that are directly thrown away or wasted, at least in part, because they will have to be redone again for the purposes of trial and on a refocused basis.  I consider an allowance of 50% of those costs to be appropriate.

[38]    I then turn to the issue of the expert witnesses’ costs, wasted again in preparation for trial. Although there are no accounts produced the plaintiffs have put letters from the experts before the Court, confirming the likely additional costs that will be incurred by them.  In the case of Mr Sclater he considers, having reviewed

the documents, the difference in his fees is likely to be approximately $5,000 to

3      Simpson v Hubbard HC Timaru CIV-2012-476-000144, 7 November 2012.

$6,100  and  Mr  Bosley  estimates  the  difference  to  be  approximately  $4,500  to

$5,500.

[39]     I am satisfied that it is also appropriate for there to be an allowance for the wasted costs of the experts’ fees.   Rule 14.12 applies.   Expert witness fees are disbursements which the Court can approve where they are paid or incurred.   I accept that witness expenses have been incurred to date and that on the basis of the information before the Court additional costs will be incurred as a direct result of the vacation of the fixture.  Again, however, I am not satisfied a full recovery based on those estimates is appropriate.  I take 50% of the lower of the two estimates in each case.

[40]     That leave the costs of this application.  Often cost matters are dealt with by way of exchange of memoranda and the Court is reluctant to award costs on costs matters.  However, in this case the matter has been the subject of a full and formal application with a notice of opposition.  In the notice of opposition the defendants have taken issue with most points raised by the plaintiffs and in fact have gone so far as to suggest that they should have costs on the application.  There has also been the hearing this morning.   In the circumstances I accept it is appropriate that costs be awarded on this application in the plaintiffs’ favour, they having succeeded.

Result/orders

[41]     The result is the plaintiffs are to have costs on the application and hearing before MacKenzie J of $2,189,00.  The plaintiffs are to have wasted solicitors’ costs on the two items I have approved in the sum of $4,975. They are also to have wasted costs of the experts for their work in the sum of $4,750.  Finally, the plaintiffs are also to have costs on this application, including this morning’s hearing and sealing in

the sum of $6,268.50, together with any disbursements as fixed by the Registrar.

Venning J