Kent Sing Trading Company Ltd v JNJ Holdings Ltd

IN THE COURT OF APPEAL OF NEW ZEALAND

I TE KŌTI PĪRA O AOTEAROA

CA34/2018
[2019] NZCA 388

BETWEEN	KENT SING TRADING COMPANY LIMITED First Appellant QUOC THAI Second Appellant LE QUAN WU Third Appellant GENERAL GOODS LIMITED Fourth Appellant
AND	JNJ HOLDINGS LIMITED Respondent

CA529/2018
BETWEEN	JNJ HOLDINGS LIMITED Appellant
AND	KENT SING TRADING COMPANY LIMITED First Respondent QUOC THAI Second Respondent LE QUAN WU Third Respondent GENERAL GOODS LIMITED Fourth Respondent

Hearing:	24 June 2019
Court:	Wild, Thomas and Muir JJ
Counsel:	M C Black for Appellants in CA34/2018 and Respondents in CA529/2018 P F Dalkie and S M Bhanabhai for Appellant in CA529/2018 and Respondent in CA34/2018
Judgment:	27 August 2019 at 11 am

JUDGMENT OF THE COURT

AThe application for leave to adduce further evidence in CA34/2018 is declined.
BThe appeal in CA34/2018 is dismissed.
CThe appeal in CA529/2018 is allowed. Judgment is entered for the appellant against the respondents in the sum of $132,770.38.
D In respect of their counterclaim in CA529/2018, General Goods Ltd and Kent Sing Trading Co Ltd are jointly and severally liable to pay JNJ Holdings Ltd costs calculated on a 2B basis plus disbursements subject to the amendments set out in [139] of the judgment.
EIn terms of cl 14.1(b) of the Lease, the appellants in CA34/2018 are to indemnify the respondent for the costs of that appeal and the respondents in CA529/2018 are to indemnify the appellant for its costs of that appeal.

____________________________________________________________________

REASONS OF THE COURT

(Given by Thomas J)

Table of contents

Para No.
Introduction	[1]
Background	[2]
The decision	[12]
Discovery	[18]
Application for leave to adduce further evidence	[21]
Deficiencies in pre-trial discovery	[28]
Documents produced at trial	[35]
Legal principles	[42]
Analysis	[49]
Pre-trial discovery	[50]
Documents produced at trial	[52]
Inferences	[64]
Water ingress	[69]
Noxious smells	[79]
Other complaints	[80]
Conclusion	[85]
Cross-examination	[87]
Legal principles	[91]
Analysis	[93]
Validity of the PLA notice	[95]
Submissions	[100]
Analysis	[102]
Costs
The Judge’s costs decision	[117]
Kent Sing’s appeal	[125]
Cross-appeal	[127]
Submissions	[128]
Analysis	[131]
Result	[140]

Introduction

On 21 December 2017, Moore J gave judgment in the sum of $215,048.42 plus interest for JNJ Holdings Ltd (JNJ) against three defendants in a lease dispute.[1] He concluded that JNJ as lessor validly cancelled the lease for non-payment of rent. The defendants (and counterclaim plaintiffs) failed almost entirely in their affirmative defences, set-off and counterclaims. They now appeal.

Background

[1]JNJ Holdings Ltd v Kent Sing Trading Co Ltd [2017] NZHC 3274.

JNJ owns a large commercial building known as the Metro Centre situated on Queen Street, Auckland (the Building). By lease commencing 1 March 2013 (the Lease), it leased premises in the upper basement floor of the Building to Kent Sing Trading Co Ltd (Kent Sing), a wholesale importation company. General Goods Ltd (General Goods), an associated company, operated Kent Sing’s retail venture out of the premises.
Kent Sing contended that the premises were not fit for purpose, being plagued by issues including water ingress (causing stock damage), a noxious smell emanating from the basement, a white sheet covering a pile of rubbish, faulty automatic doors, and a lack of signage. It claimed JNJ did not respond adequately to complaints.
Little more than a year after the Lease commenced, Quoc (Ken) Thai, one of the directors and shareholders of Kent Sing and the second appellant,[2] wrote to JNJ’s general manager, Mr Van Der Ham, raising these concerns. He claimed a chronic failure on the part of JNJ to rectify the problems and purported to give notice of General Goods’ intention to sublet the premises. He also claimed the right to terminate the Lease with immediate effect.
[2]Le Quan Wu, the third appellant, is Mr Thai’s wife and the other director and shareholder of Kent Sing.
A face to face meeting between the parties did not resolve matters and, on 5 May 2014, Lucinda Thai, the daughter of Mr Thai and Ms Wu, again wrote to Mr Van Der Ham. This time she purported to cancel the Lease on account of these issues. The last day of trading was to be 30 June 2014.
Prior to that date, however, on 11 June 2014, JNJ had issued Kent Sing a notice under ss 245 and 246 of the Property Law Act 2007 (the PLA notice) advising that rent and operating expenses totalling $20,199.45 were due and, unless paid within 10 working days, being 25 June 2014, JNJ intended to exercise its remedies under the Lease, including cancellation and re-entry.
The breach was not remedied. On 25 June 2014, Kent Sing removed its stock from the premises and the following day JNJ re-entered.
On 27 June, Kent Sing paid JNJ $20,199.45.
JNJ sued Kent Sing for breach of the Lease. It sought damages of $235,838.82 plus interest and costs for expenses associated with obtaining a new tenant, unpaid rent and other expenses. It also sued Mr Thai and Ms Wu as guarantors.
By its third amended statement of defence, set-off and counterclaim, Kent Sing claimed the PLA notice was invalid and, in any event, JNJ’s breach of express and implied terms meant Kent Sing was justified in cancelling the Lease. It asserted all rent was paid and JNJ wrongfully repudiated the Lease. Three affirmative defences were pleaded, claiming numerous breaches of express and implied obligations in the Lease, failure to provide possession of the whole of the premises and misrepresentation. The guarantors denied liability on the same basis.
The defendants claimed a legal and equitable right of set-off and/or counterclaim, saying they had validly cancelled the Lease, JNJ had no entitlement to damages and, if they had any liability to JNJ, their losses should be set off. They and General Goods claimed stock damage of $57,478.73, excess rent payments of $55,696.57 and loss of profit of $519,141.89 plus GST, interest and costs. They also claimed damages in negligence, breach of contract and tortious interference with goods.

The decision

The Judge found JNJ had validly cancelled the Lease after Kent Sing failed to pay rent and other payments by the due dates.[3] His damages award of $215,048.42 plus interest represented a reduction in some of the amounts claimed, due to his finding that the contractual rate of interest was an unenforceable penalty.[4]
[3]JNJ Holdings Ltd v Kent Sing Trading Co Ltd, above n 1, at [447].
[4]At [365]–[377].
The Judge rejected all Kent Sing’s affirmative defences. He found the claims of water ingress and a noxious smell were exaggerated,[5] no representations about signage had been made, and that any delays in putting up signage were attributable to both parties.[6] He rejected claims concerning the automatic doors,[7] failure to carry out lessor’s works on the premises,[8] maintenance of the roof and common area,[9] failure to provide utility services,[10] and failure to deliver up.[11] Those claims were also bundled into generic claims of breach of terms to give business efficacy, quiet enjoyment and derogation from grant. These broader claims, too, were unsuccessful.[12] In short, the Judge concluded the suggestion Kent Sing was justified in (purportedly) terminating the Lease due to JNJ’s conduct was untenable.[13]
[5]At [145] and [182].
[6]At [237].
[7]At [251].
[8]At [265]–[267].
[9]At [270]–[271].
[10]At [284].
[11]At [290]–[305].
[12]At [318]–[324]; [336]; and [350]–[353].
[13]At [389].
The Judge found that exclusion clauses in the Lease prohibited a claim in damages arising out of breach of contract and/or tortious interference with goods.[14] He found JNJ was not liable in negligence, both because JNJ did not owe a duty of care and because JNJ was not negligent.[15] On the whole, he found there was insufficient evidence to establish any liability and concluded that JNJ was not in breach of the Lease when it was cancelled.[16]
[14]At [407].
[15]At [411]–[412].
[16]At [447].
JNJ, as the successful party, then claimed indemnity costs pursuant to the Lease of $203,820.59 against Kent Sing, and against Mr Thai and Ms Wu as guarantors.[17] Costs on a 2B basis and disbursements totalling $71,637.00 were also claimed against General Goods in respect of the counterclaim. The Judge accepted JNJ’s contractual entitlement to indemnity costs and to costs on the counterclaim. In light of what he viewed as deficiencies in the costs claims, he awarded JNJ $61,146.18 in respect of its claim and $21,491.10 in respect of the counterclaim.[18]
[17]The total amount claimed for costs and disbursements against the defendants did not include $9,303.16 already paid by the defendants on the discovery application.
[18]JNJ Holdings Ltd v Kent Sing Trading Co Ltd [2018] NZHC 2022 at [69]–[70].
There are four grounds of appeal:
(a)breaches of discovery obligations;
(b)alleged failure to cross-examine the appellants’ witnesses;
(c)invalidity of the PLA notice; and
(d)costs.
JNJ has cross-appealed the costs decision.

Discovery

The main ground of appeal is that the Judge erred in law and/or fact in failing to take into account and have any proper regard to the importance of pre-trial discovery, the relevant details of which can be summarised in the following way:
(a)In March 2016, Kent Sing had sought further and better discovery, including all records in support of JNJ’s claim to cancel the Lease and all records/communications concerning water ingress and nuisance, including proof JNJ had carried out the lessor’s works.
(b)On 8 April 2016, the Court ordered, by consent, that JNJ file and serve an affidavit as to further discovery. On 19 April 2016, JNJ’s in-house lawyer, Mr Park, filed an affidavit saying JNJ did not have any more documents of the kind stipulated and had carried out a check to ensure this was the case.
(c)When Mr Park was giving evidence, it became apparent there were other documents that had not been discovered and were introduced for the first time by JNJ at trial. These were relevant and material to water ingress and nuisance, and to the amounts JNJ claimed were payable. There were also other relevant documents identified in evidence that should have been discovered.
(d)Kent Sing’s trial counsel objected to the production of these documents at trial. The Judge ruled the documents introduced at trial would be “provisionally” admitted but, Kent Sing argues, failed either in the trial or in the judgment to give any consideration or weight to JNJ’s discovery breaches. This included adverse inferences that Kent Sing contends should have been drawn against JNJ that should have affected the weight of the evidence relied upon by JNJ, and its credibility.
(e)Kent Sing says it was at a material disadvantage and prejudiced by the failure to comply with discovery. If full and proper discovery had been given, Kent Sing says it would have made other inquiries and called other evidence.
The appellants say the Judge’s failure to take into account JNJ’s discovery breaches involved a miscarriage of justice and an error of law, making the judgment and findings unsafe.
There are three separate issues in relation to discovery:
(a)an application for leave to adduce further evidence;
(b)alleged deficiencies in pre-trial discovery; and
(c)the admission of documents at trial.

Application for leave to adduce further evidence

The appellants apply for leave to adduce further evidence on appeal.[19] They say this evidence is relevant but was not disclosed or discovered prior to the trial.
[19]Court of Appeal (Civil) Rules 2005, r 45.
Michele Thai has sworn two affidavits in support of the application. In the first, she exhibits a video and news item posted on Radio New Zealand’s website and other articles in the media involving the Building. It alleges the Building was non‑compliant with fire safety requirements in that it had not had a warrant of fitness for 435 days; was issued with a dangerous building notice that was later lifted; and had not been fire compliant since 2014. The news item referred to comments from and interviews with JNJ’s former project manager (Calvin Clapperton), an officer from Auckland Council and fire protection companies. Mr Kwak (the director of JNJ) was unable to be contacted.
Michele Thai says this information disclosed serious issues and concerns about the lack of maintenance and other defects in the Building, which applied to the period when Kent Sing was in occupation. She says these issues were consistent with, and symptomatic of, the defects Kent Sing claims it suffered while in occupation under the Lease. She claims the material was relevant but not discovered prior to the trial.
Michele Thai’s second affidavit relates to a meeting she and her father attended with Mr Clapperton in April 2019. She says Mr Clapperton told her that the premises always leaked, and records would show that the entire ceiling and lights had to be replaced because of water damage.
Mr Clapperton was interviewed by Mr Black, counsel for the appellants in CA34/2018. He prepared a draft statement for Mr Clapperton, who has not signed it. This draft statement was also tendered as part of the application to adduce further evidence. It says Mr Clapperton was involved with and can directly comment on JNJ’s record‑keeping and information systems and that detailed records exist that should include evidence about smell and water ingress problems at the Building, which could well have affected the premises.
The grounds of the application to adduce further evidence were that the defective nature and dangerous state of the premises was a relevant and material inquiry; the information disclosed material evidence relevant to the defective state of the premises; JNJ’s failure to discover this information was consistent with its failure to discover other information about the defective state of the premises; and it would have been relevant to the Judge’s assessment and findings of fact and credibility.
The further evidence is not admissible, it being neither cogent nor fresh.[20] It is simply an attempt to fortify Kent Sing’s argument that JNJ breached its discovery obligations. The evidence is hearsay, post-dated the events at issue and relates in the main to fire systems in the Building, something that was not at issue between the parties. The unsigned statement from Mr Clapperton says there were daily records for the Building, something that, in any event, became evident at the trial in the evidence of Mr Van Der Ham.

Deficiencies in pre-trial discovery

[20]Erceg v Balenia Ltd [2008] NZCA 535 at [15].

Mr Black referred to the less than satisfactory history of the proceedings, saying that discussions about, and criticisms of, JNJ’s discovery was a constant theme in case management conferences and in correspondence between the respective lawyers. Mr Black continued to record Kent Sing’s concern as to JNJ’s non‑compliance with its discovery obligations. JNJ continued to assert it had complied. Exchanges between the lawyers on the topic continued until the trial.
The merits of those requests became apparent during the trial, Mr Black said, when certain key documents were produced that were relevant to water ingress, health and safety, and smell issues. Because JNJ had not dealt properly and fully with discovery, Kent Sing was deprived of lines of inquiry that could have supported its position. This, Mr Black said, meant the trial Judge did not have a proper documentary basis on which to evaluate his factual findings. This should have given rise to strong adverse inferences against JNJ.
As an example, Mr Black referred to the Judge’s consideration of whether JNJ had carried out the landlord’s works. The Judge found the onus was on Kent Sing to adduce evidence the works were not undertaken. In Mr Black’s submission, that evidence was in JNJ’s control.
The deficiencies in discovery were discussed with Mr Park at the trial. He explained how it was that some documents were not discovered (he undertook a search for documents by searching various words and phrases).
Mr Dalkie, for JNJ, said Kent Sing could have made an application pre-trial for further and better discovery but did not do so. Mr Dalkie accepted that a supplementary bundle of documents was provided to Mr Black on 25 January 2017, less than three weeks before the start of the trial. He pointed out, however, that the majority of documents in that bundle were emails between the parties and therefore available to Kent Sing in any event.
Mr Dalkie referred to the fact that the Building contained more than 40 tenancies and there were issues concerning the relevance of documents to the premises. He did accept the keyword search undertaken by Mr Park was perhaps too narrow. Mr Dalkie’s point, however, was that Mr Black was essentially contending he should have received information on the whole Building and that was simply not correct. In Mr Dalkie’s submission, in substance Kent Sing wanted JNJ to produce all its files and records so it could trawl through them with a view to finding a defence. He described this as a fishing expedition.[21]
[21]See W A Pines Pty Ltd v Bannerman (1980) 30 ALR 559 (FCA).
Mr Dalkie then referred to the difficulties with Kent Sing’s discovery on the counterclaim. For example, there was a lack of invoices to support the claimed value of goods allegedly damaged by water ingress.

Documents produced at trial

Mr Black maintained that, as the trial developed, it became apparent JNJ had other discoverable information that it had failed to disclose, as set out in a schedule he provided to this Court on appeal. He then said that, during the trial, other aspects of non-discovery were identified, as set out in a second schedule. This included material identifying records that should have been discovered and contractors who had worked at the Building. He described this as the “piecemeal/unravelling” of JNJ’s documents, which prejudiced Kent Sing by denying it the right and opportunity to follow up relevant lines of inquiry.
In Mr Black’s submission, the Judge ought to have ruled documents produced during the trial inadmissible. He criticised the Judge for provisionally admitting documents but not making any final determination, including in the judgment itself, which makes no reference to the status of the undiscovered documents.
Mr Black gave as an example documents relevant to the PLA notice. He explained that the rent statements and invoices that had been discovered were said to be incorrect during Mr Van Der Ham’s cross-examination. JNJ then introduced new invoices and documents. He also referred to the evidence of Mr Mawella, who produced a small bundle of new documents.
Mr Dalkie pointed out that JNJ tendered 13 exhibits during the trial, Kent Sing eight. As to the documents relevant to the PLA notice, Mr Dalkie observed that exhibit 11, to which Mr Black objected, was a series of emails between JNJ and Mr Thai, when JNJ sent Mr Thai the monthly invoices for rent and operating expenses. Mr Dalkie said, although the emails were located at a late stage, they could hardly have caused Kent Sing any surprise or concern, given they were documents that had passed between the parties.

Of JNJ’s exhibits, Mr Dalkie clarified that only two (exhibits 6 and 7) were provisionally admitted, both being security reports for different time periods. Exhibit 6 was a record of the callouts for the Building during a period of Kent Sing’s tenancy and was contrary to Kent Sing’s claim that there was constant water damage. He said it also undermined Kent Sing’s evidence that the Building management failed to respond to their complaints. Exhibit 7 concerned callouts relevant to a period of the subsequent tenancy of the premises.
Four of the other exhibits (exhibits 9, 10, 12 and 13) concerned the subsequent tenancy of the premises. Mr Dalkie said Mr Black called two witnesses under subpoena to give evidence about the subsequent tenancy but then objected to the documents JNJ produced in rebuttal. He pointed out that, had the witnesses not been called, then the documents would not have been necessary, nor would it have been necessary to call Mr Mawella.
Mr Dalkie suggested the Judge implicitly ruled on the documents and what weight he gave to them. He said a reading of the judgment made it clear that there was overall consideration of the documents and, in any event, decisions were made on the facts, including the documents tendered during the trial. Mr Dalkie pointed out that at no stage was the trial Judge requested to make a formal ruling on the admissibility of the documents.

Legal principles

The High Court Rules 2016 require parties to produce all documents in their possession that are relevant to the issues and proceedings. This includes the obligation to produce documents that adversely affect that party’s own case.[22] An order for particular discovery can be made at any stage.[23] A solicitor’s discovery obligations are specifically provided for.[24] A party must make a reasonable search for documents within the scope of the discovery order.[25] The obligation to give discovery is a continuing one and applies at all stages of the proceeding.[26] If a document is not included in the common bundle, it may be produced at the trial only with the leave of the court and the court may grant leave unless production of the document would cause an injustice.[27] An order for particular discovery can be made after a proceeding has commenced.[28]
[22]High Court Rules 2016, r 8.7(b).
[23]Rules 8.5 and 8.8–8.9.
[24]Rule 8.13.
[25]Rule 8.14(1).
[26]Rule 8.18(1).
[27]Rule 9.6.
[28]Rule 8.19.
The learned authors of Disclosure explain that, where there has been a failure to comply with a disclosure obligation, the court can intervene in order to ensure a fair trial.[29] The court has a broad range of orders it may make at its discretion to enforce a party’s obligations on disclosure, the three main options being:[30]
(a)an extension of time within which the defaulting party must comply;
(b)an extension of time under an unless or conditional order, spelling out the consequences of the failure to comply, including a strike-out of the case of the defaulting party; and
(c)an immediate order striking out the statement of claim or defence of the defaulting party.
[29]Paul Matthews and Hodge M Malek Disclosure (5th ed, Sweet and Maxwell, 2017) at [17.05].
[30]At [17.05]. Although the text relates to the rules in England and Wales, they are for all intents and purposes the same as those applying in New Zealand.
They say that a proceeding may only be struck out:[31]
… where there has been a deliberate and continuing refusal to provide disclosure or where the default has made the fair trial of an action impossible or prevented the court from doing justice.
[31]At [17.07].
It is also open to the court to find a party who has deliberately failed to provide disclosure to be in contempt.[32] Ordinarily, however, the appropriate sanction for failure to comply with a disclosure order is a strike-out (if the threshold for that is met), together with an adverse costs order.[33]
[32]At [17.31]; and High Court Rules, r 8.33(1).
[33]At [17.33].
That this is also the New Zealand approach is evident from various cases.[34]
[34]Established Investments Ltd (in liq) v Armitage HC Auckland CIV-2004-404-4084, 2 April 2007; Commonwealth Reserves I v Chodar [2001] 2 NZLR 374 (HC) at [25]; Hopman v Peka HC Auckland CP132/94, 24 April 1998; and Prokofyev v A O Karelrybflot (1998) 12 PRNZ 510 (HC) at 512.
The learned authors recognise that it is open to the court to draw adverse inferences at trial in relation to the absence of documents, the obvious example being where the court concludes a document has been deliberately destroyed. It is then open to the court to draw an inference that the deliberate destruction demonstrates that party’s consciousness of the weakness of its claim. From that the court may infer that the claim lacks truth or merit. It has been held that, to draw the inference that the document is unfavourable to the party who has destroyed it, there must be some evidence of the contents of the destroyed document. Negative inferences can be drawn about issues specifically related to the categories of documents a party has failed to disclose in breach of disclosure obligations.[35]
[35]At [17.38].
A court can consider whether, had disclosure been given, this might have affected the result of the case. The learned authors explain:[36]
In one case, the Court of Appeal ordered a new trial where the defendant’s failure to give proper disclosure had resulted in the claimant’s claim being dismissed. In determining whether to order any new trial, the court may take account of a variety of factors, in addition to the general considerations relating to the administration of justice, including the degree of culpability of the successful party, any lack of diligence by the unsuccessful party, and the extent of any likelihood that the result would have been different if the order had been complied with and the undisclosed material had been made available. The appellate court will not order a retrial unless it can be persuaded that there is a real possibility that an opposite result would have been produced had proper disclosure been given.

Analysis

[36]At [17.40] (footnotes omitted).

The central issue for us is whether JNJ’s alleged failure to comply with its discovery obligations resulted in a trial and judgment that was “unsafe”. We note there is no challenge to any of the findings of fact made by the Judge, nor any challenge to his analysis of the law (in respect of the alleged breaches of the Lease and defects in the premises).

Pre-trial discovery

By reference to the various lawyers’ bills of costs throughout this period, Mr Black attempted to show that relatively little time had been spent in dealing with discovery. But that may simply reflect the involvement of JNJ’s in-house lawyer who provided the affidavit of documents.
Mr Black’s complaints about discovery continued up to and throughout the trial. He repeated that refrain in his closing submissions, also complaining that there were a number of witnesses who should or could have been called by JNJ to give evidence but were not. He said deficiencies in discovery, as exemplified by the documents produced by JNJ at trial, hindered Kent Sing’s ability to pursue matters of relevance to its defence and counterclaim. He asked the Judge to draw adverse inferences against JNJ in the circumstances.

Documents produced at trial

Kent Sing subpoenaed two witnesses who were the subsequent tenants of the premises. Four of JNJ’s trial exhibits concerned the subsequent tenancy. They had not been discovered on the basis they were irrelevant. We agree. The exhibits were essentially adduced in evidence by way of rebuttal. The emails from JNJ to Kent Sing containing the monthly invoices for rent and operating expenses cannot on any sensible basis be objected to.
There is, however, no doubt there were deficiencies in discovery. A clear example concerns the security reports. Mr Dalkie had given Mr Black the documents on the first day of the trial. They amounted to approximately 30 pages of excerpts from the security reports.
On the third day of trial, when Mr Dalkie was about to ask Mr Park about the investigations he undertook to locate the security reports, Mr Black objected. The subsequent exchange between the Judge and counsel in chambers is difficult to follow in the absence of the documents in fact discussed, and there appears to have been some confusion between the security reports and the maintenance records that had been specifically requested by Kent Sing’s lawyers on 11 March 2016. Mr Dalkie maintained that at least some of the source documents had been given to Kent Sing in March 2016 (the trial began in February 2017), but he accepted that others had not been discovered.
The security reports for the period 5 February 2014 to 25 March 2014 during Kent Sing’s tenancy (exhibit 6) recorded one water leak involving the premises reported to security during that period. There was also a reported water leak in relation to an adjoining tenancy.
Mr Dalkie also proposed to put the other set of security reports (exhibit 7) to the subsequent tenants of the premises. He informed the Judge that he had only recently learned those witnesses were to be subpoenaed which explained why those documents had not been discovered. Mr Black objected to this, relying on r 8.31 of the High Court Rules, which provides:
8.31 Effect of failure to include document
A document that should have been included in a party’s affidavit of documents may be produced in evidence at the hearing only with the consent of the other party or parties or the leave of the court.
Mr Black maintained the security reports should have been discovered earlier, which would have enabled Kent Sing to make its own inquiries. He submitted that the tables to the reports might well have been selective and the underlying source material should have been discovered. The Judge accepted these points and suggested that Mr Park could be cross-examined on them.
The Judge considered the issue was whether the documents could assist in challenging JNJ’s claim or supporting Kent Sing’s claim. He accepted that Mr Black’s objection amounted to an allegation JNJ had breached the Court’s discovery order. The Judge said he had to consider the nature of the breach and whether there was any prejudice. He then said:
… I think we’ll operate on the basis that I’ll provisionally admit these subject to hearing evidence in respect of them and receiving any further submissions as to their admissibility and, if admitted, what weight should be attached to them.
He reserved to Mr Black the ability to raise objections in respect of any other documents produced during the trial.
While we acknowledge Mr Black’s complaints about the deficiencies in JNJ’s discovery, the fact is the trial was allowed to proceed. There had been no pre-trial application for a strike-out of JNJ’s claim or for an adjournment of the trial or a stay of the proceedings pending proper discovery. We acknowledge that Kent Sing was entitled to pursue its counterclaim but, if it really was as disadvantaged as it claimed through lack of proper discovery, it should have raised the matter with the Court and sought further orders.
Similarly, as matters arose during the trial, counsel for Kent Sing could have applied for an adjournment, either for a time sufficient to enable him to come to grips with the documents JNJ produced, or, if he considered prejudice to Kent Sing was sufficiently material, to a new trial date. If either had been granted, cost implications would have followed. It was in Kent Sing’s hands. Having pursued neither of those options, it is untenable to seek on appeal that the judgment be set aside in whole or in part and the proceedings remitted back to the High Court for reconsideration. Having elected to continue with the trial, Kent Sing was fixed with that choice and the consequences.
Although Mr Black registered various objections throughout the evidence, he did not ask the Judge to revisit the provisional admission of the documents. For that reason, we consider the Judge was entitled to treat the documents as having been admitted without qualification.
It is evident that criticisms could also be levelled at Kent Sing in respect of discovery. For example, Lucinda Thai, in her affidavit opposing JNJ’s application for summary judgment, exhibited pages from the diary kept by Kent Sing that recorded problems with the premises. She said there were further entries supporting Kent Sing’s position, which could be produced if required. Because the diary was apparently misplaced, it was not discovered.

Inferences

In his closing submissions, Mr Black again referred to the deficiencies in JNJ’s discovery and asked the Judge to draw adverse inferences from that.
As discussed above, the court will draw adverse inferences from breaches of discovery obligations in limited circumstances. The authorities are confined to circumstances where documents have been destroyed or there has been a failure to give “proper” disclosure.[37] For example, in The Ophelia, one party had deliberately destroyed documents leading to the unsurprising result that adverse inferences against it were drawn.[38]
[37]See [47] above.
[38]The Ophelia [1916] 2 AC 206 (PC) at 229–231.
An appellate court will interfere with a judge’s assessment of the credibility of witnesses only where the evidence accepted by the judge is inconsistent with facts incontrovertibly established by the evidence or is patently improbable.[39] There is, however, no authority for the proposition that a fact finder can disregard evidence given at trial on the basis of a supposition that there might be other evidence that had not been called.
[39]Hutton v Palmer [1990] 2 NZLR 260 (CA) at 268.
It is clear to us that the Judge’s conclusions rested primarily on his findings as to the credibility of the various witnesses and those findings outweighed any adverse inferences that might have been available to him in respect of the deficiencies in JNJ’s discovery.
To demonstrate this point, we return to the Judge’s decision and his reasoning on the central issues.

Water ingress

The Judge observed that the differences in the evidence of the respective parties were so stark that findings of credibility and reliability were required.[40] Kent Sing’s witnesses suggested the leaks were so numerous and substantial that it was simply impracticable to continue trading. JNJ’s witnesses accepted there were leaks from time to time but said it was not at the frequency alleged and they were generally minor. In any event, JNJ claimed that, when Kent Sing complained, the leaks were attended to in a timely and effective manner.
[40]JNJ Holdings Ltd v Kent Sing Trading Co Ltd, above n 1, at [99].
The Judge found a major leak had occurred on 9 February 2014.[41] Contrary to Lucinda Thai’s complaint that this leak was not properly addressed, the Judge found JNJ’s response was prompt and effective, as confirmed by JNJ’s incident reports of that time, which showed work continued over a number of days.[42] He noted there were four other incidents (10 April 2013, 20 May 2013, 2 August 2013 and 15 September 2013) but concluded it was unlikely there were any other leakage events worthy of note.[43]
[41]At [108].
[42]At [110]–[111].
[43]At [113] and [125].
The Judge placed little weight on Mr Thai’s evidence, noting he spent relatively little time at the premises and his evidence was heavily dependent upon the observations of others.[44] The Judge commented that, although Mr Thai elevated the significance of the water leaks, that issue was not at the front of his mind in his last correspondence with Mr Van Der Ham on 27 June 2014, where his only observation about the premises was that the downstairs space had “quite an unpleasant smell”.[45] There was no mention of water leaks.
[44]At [103].
[45]At [104].
The Judge did not find Lucinda Thai, who was the primary witness for Kent Sing, to be a convincing or reliable witness.[46] He was satisfied the scale of water ingress was a good deal more modest than she claimed. He concluded the claims that calls for assistance from JNJ were left unanswered were exaggerated and unsupported by documentary records.[47]
[46]At [127].
[47]At [128]. The Judge analysed Kent Sing’s telephone records and concluded they did not support Lucinda Thai’s version of events.
The Judge’s findings regarding Lucinda Thai’s evidence were important because she was the representative of Kent Sing at the meeting with Mr Van Der Ham on 31 March 2014. The Judge concluded it was inherently unlikely Mr Van Der Ham would have conceded his management of the Building was effectively incompetent (as Lucinda Thai alleged he did) and concluded Lucinda Thai was prone to hyperbole on the central allegations.[48]
[48]At [129]–[130].
The Judge considered his assessment of Lucinda Thai was supported by other material. He said:
[131] My assessment of Lucinda Thai is fortified by other aspects of the documentary record, in particular, the exchange of emails. For example, on 6 November 2013, eight months into the tenancy, Lucinda Thai on behalf of her father, complained to Mr Van der [Ham] about the lack of signage. Despite the directness of her language, nowhere in this correspondence, or in any earlier emails, was there any mention of water leaks or damage to stock. If the levels of stock damage were as extensive as that claimed it is more than a little surprising that no contemporaneous complaint was registered with the landlord while other complaints, arguably a good deal less serious, were.
The Judge noted that the Thais were not a commercially naïve family and Lucinda Thai held a Bachelor of Commerce degree.[49] He described her as forthright and intolerant of what she regarded as professional lapses by the Building’s management but noted it was not until 25 March 2014, more than a year after General Goods first occupied the premises, that the issue of water leaks was first mentioned. He observed this dearth of recorded complaint about water leaks was never properly answered in the evidence.[50]
[49]At [132].
[50]At [132].
The Judge made similar observations regarding Michele Thai.[51] The last witness for Kent Sing was the shop supervisor, who did not spend long periods there and was on leave for other periods.[52]
[51]At [133].
[52]At [134].
In contrast, the Judge was impressed by the two witnesses for JNJ, Mr Young and Mr Van Der Ham.[53]
[53]At [139] and [144].
The Judge did not find the evidence from the subsequent tenants who spoke about water ingress either reliable or relevant.[54]

Noxious smells

[54]At [146]–[155].

The Judge undertook a site visit.[55] This led him to the view that the claims by defence witnesses that the food court tenants were using a sub-basement area to store food or waste were incapable of belief.[56] He described the defendants’ claims as, in material respects, misconceived, exaggerated and patently incorrect on the evidence.[57] He accepted Mr Van Der Ham’s evidence on the issue.[58] He concluded the claims regarding noxious smells were, at the very least, exaggerated and at worst deliberately misleading.[59]

Other complaints

[55]At [167].

[56]At [176].

[57]At [177].

[58]At [179].

[59]At [182].

Similar issues were apparent when the Judge considered Kent Sing’s claim about signage. The Judge concluded that Mr Young’s version of events on behalf of JNJ was supported by the proposal to lease.[60] He gave six reasons for regarding it as “inconceivable” that JNJ or its agents would have agreed to an open-ended signage proposal of the sort asserted by Lucinda Thai.[61]
[60]At [213]–[215].
[61]At [228].

The automatic doors featured in the case both as a particular as to why the premises were not fit for purpose and in Kent Sing’s claim that it was unable to obtain possession of the premises by reason, inter alia, of the door problems.[62] The Judge regarded it as significant that neither of the emails purporting to terminate the Lease referred to the doors.[63]
[62]At [238]–[239].
[63]At [248].
Kent Sing adduced no evidence that the works JNJ was required to carry out to the premises were not undertaken and the Judge concluded it had not discharged the onus on it in this regard.[64] He was, in any event, satisfied on balance that the work was completed, given the absence of any complaint that it had not been.[65]
[64]At [255] and [260].
[65]At [260].
The Judge considered whether the alleged breaches were a substantial interference with Kent Sing’s right of quiet enjoyment. He was satisfied Kent Sing had experienced a number of water leaks, likely caused by defects in the air conditioning, and there were other leaks, the circumstances of which were more difficult to analyse.[66] In any event, he was satisfied that, given the absence of contemporary records showing these were brought to the attention of the landlord, it was likely, if they did occur, they were not as significant or destructive as Kent Sing claimed.[67] He concluded the necessary threshold of substantiality was not met.[68] The same applied to the question of smells and goods damaged by water.[69]
[66]At [319]–[321].
[67]At [321].
[68]At [322].
[69]At [323]–[324].
The Judge regarded the appellants’ evidence in respect of their claim for stock damage as unreliable and falling well short of satisfying him on the balance of probabilities.[70]

Conclusion

[70]At [441].

We have spent some time detailing the Judge’s findings and his reasons for them. He found Kent Sing’s witnesses lacking in credibility and reliability. Notably, it was the absence of documentation from Kent Sing’s own records that supported those findings. It is clear, therefore, that the circumstances of this case, notwithstanding JNJ’s deficiencies in discovery, fall well short of the situation where a retrial would be ordered. There was no real possibility that proper discovery would have produced the opposite result.
We dismiss this ground of appeal.

Cross-examination

Kent Sing claims JNJ’s counsel failed to put JNJ’s case fairly to Kent Sing’s witnesses. Of the six witnesses called on water ingress and nuisance, Mr Black said that JNJ’s counsel only cross-examined Lucinda Thai on crucial factual issues. This meant, in Mr Black’s submission, the Judge failed to give proper and sufficient consideration and weight to the appellants’ evidence in making factual determinations.
Mr Dalkie categorised this as another attempt to side-step any direct challenge to the findings of the Judge in which credibility featured heavily. He noted the evidence of Kent Sing’s witnesses was contradicted by other evidence. He referred to contemporaneous documents produced by Kent Sing that conflicted with the evidence of its witnesses.
Mr Dalkie added observations of his own. For example, that Mr Thai produced two sets of accounts for the same business, yet insisted they were all true and correct. In his submission, several witnesses gave evidence that misplaced various physical features. An example was evidence that located the white sheet in the wrong place.
Mr Dalkie explained why he had not cross-examined Mr Thai on the water damage or other alleged complaints: he had no direct knowledge; his own contemporaneous documents showed no mention of water ingress; and in many places in his evidence he made it clear he would defer to Lucinda Thai, who was the principal witness. Although Lucinda Thai claimed there were constant and persistent water ingress problems, Mr Dalkie pointed out that none of her emails at the time made any reference to such problems; there was no complaint about water ingress at all during 2013; she complained in writing about water ingress only in March and May 2014, and it was the same complaint made twice. Mr Dalkie said Michele Thai claimed the white sheet was to cordon off an area in the lower basement but, in cross‑examination, confirmed she had not actually been down there and seen it. There was limited cross‑examination of her on water damage as she did not feature in most of the contemporaneous notes.

Legal principles

Section 92 of the Evidence Act 2006 enshrines the rule in Browne v Dunn and provides:[71]
92 Cross-examination duties
(1) In any proceeding, a party must cross-examine a witness on significant matters that are relevant and in issue and that contradict the evidence of the witness, if the witness could reasonably be expected to be in a position to give admissible evidence on those matters.
(2) If a party fails to comply with this section, the Judge may—
(a) grant permission for the witness to be recalled and questioned about the contradictory evidence; or
(b) admit the contradictory evidence on the basis that the weight to be given to it may be affected by the fact that the witness, who may have been able to explain the contradiction, was not questioned about the evidence; or
(c) exclude the contradictory evidence; or
(d) make any other order that the Judge considers just.
[71]Browne v Dunn (1893) 6 R 67 (HL).
This Court has described one of the underpinning rationales for the rule as fairness, and has emphasised that the rule is not absolute and need not be slavishly followed if the witness is perfectly well aware that their evidence on a particular point is not accepted.[72] The focus must be upon any unfairness occasioned by the failure to cross-examine and whether such failure prejudiced a party’s right to have key matters assessed at trial. If evidence relevant to credibility is not tested when it ought to be, it is likely to be unreasonable for the trier of fact to make an adverse finding in respect of credibility.[73]

Analysis

[72]R v Dewar [2008] NZCA 344 at [43]–[44].

[73]Gutierrez v R [1997] 1 NZLR 192 (CA) at 199.

Once it was clear that Mr Thai and Michele Thai were infrequently at the premises, there was little point in further cross-examination and there was certainly no need to put every aspect of JNJ’s claim to them. Furthermore, it does not appear that this issue was raised at trial, including in counsel’s closing submissions.
The issues in dispute were squarely before the Judge. We do not consider there was any material failure to observe the cross-examination duties set out in s 92 of the Evidence Act. We dismiss this ground of appeal.

Validity of the PLA notice

Kent Sing appeals on the basis the PLA notice was founded on inconsistent and incorrect matters of fact and was invalid. Furthermore, it is claimed certain provisions of the Lease provided Kent Sing further time than the 10-day period relied upon by JNJ in the PLA notice and, applying the clauses correctly, the 10-working day period did not expire until on or about 14 July 2014.
The PLA notice, dated 10 June 2014, reads as follows:
…
1. As at the date of this notice, you are in breach of the Lease by failing to:
(a) pay the rent for the premises, the arrears of which $11,423.33; and
(b) pay the operating expenses, utility charges and promotion fund levy under clause of the Lease, the arrears of which total $8,776.12.
2. You are hereby called upon to remedy the breach outlined in paragraph 1 above by paying the arrears of rent and outgoings being the total amount of $20,199.45.
3.In addition, you are required to make payment of all costs, charges and expenses for which the Landlord shall become liable in consequence of or in connection with any breach of default by the Tenant under the Lease and in respect of this obligation you are required to make payment of costs and disbursements.
4. Unless the foregoing breach is remedied within 10 working days from the date of service of this notice, being by 25 June 2014, then without any further warning or demand, the Landlord intends to exercise each and every remedy which is available to the Landlord because of your continuing breach including, by way of example only but not of limitation, cancelling the Lease by re-entering the Premises under section 244(1)(b) of the Property Law Act 2007.
5.Under section 253 of the Property Law Act 2007, you have the right to apply to a court for relief against the cancellation of, or proposed cancellation of, the Lease as contemplated by this notice. It is advisable for you to take legal advice on the exercise of that right.
Subsequently, JNJ provided Kent Sing with a statement dated 12 June 2014, which referred to three different invoices comprising the sum claimed to be owing. The statement confirmed the sum owing as $20,199.45.
The Judge concluded that, as at 1 June 2014, rent of $11,423.33 was due and payable and was unpaid until 27 June 2014.[74] He accepted that the operating expenses claimed by JNJ were due and payable on 1 June 2014 and any technical breach of the Lease regarding their calculation did not affect JNJ’s cancellation rights.[75] He found Kent Sing was in breach of its obligation to pay marketing and promotional funding.[76] However, he found that Kent Sing was not in breach of its obligations to pay for consumables (utilities).[77]
[74]JNJ Holdings Ltd v Kent Sing Trading Co Ltd, above n 1, at [60].
[75]At [65].
[76]At [72].
[77]At [70].
The Judge did not consider this deficiency affected JNJ’s ability to cancel the Lease for non-payment of rent. Effectively, he treated the PLA notice as two separate notices, one of which was compliant, the other not.[78]

Submissions

[78]At [84].

In Mr Black’s submission, JNJ wrongly and inconsistently recorded the basis for the amounts specified in the PLA notice and the rent, as GST and operating expenses were not all due by the date of the PLA notice. He said the PLA notice expired on 25 June 2014 but the correct calculation of the 10 working days period meant it could not take effect until at least 26 June 2014. Furthermore, on his interpretation, the Lease granted a further time period to the appellants than that specified in the PLA notice, so the time period did not expire until on or about 14 July 2014.
In Mr Dalkie’s submission, Kent Sing’s appeal on this point re-runs the arguments that were rejected by the Judge, but it was not demonstrated that the Judge made an error. The rent was due on the first day of each month; invoices were sent by email; Mr Thai did not appear confused; and he paid all amounts outstanding (albeit too late).

Analysis

JNJ must be taken to have accepted the Judge’s finding that payment for consumables/utilities was not outstanding as at the date of the PLA notice as there was no appeal on this point.
There is longstanding authority for the proposition that a notice is not invalid merely because it demands a greater sum than is actually owed. In Campbell v The Commercial Banking Company of Sydney, the Privy Council was concerned with s 55 of the Real Property Act 1862 (NSW), which required a mortgagee to give notice to a mortgagor in case of default. The mortgagee demanded £20,029, when nearly all of it was unquestionably due. With respect to any small amount that might not have been owing, the Privy Council held:[79]
… the learned judges of the Supreme Court have held, and in their Lordships’ opinion, have correctly held, not only that a notice under the Act is not bad because it demands more than is due, … but that where a demand is made for a larger amount than that which is really due, such demand does not do away with the necessity for tendering what is actually due, unless there is at the same time refusal to receive less.
[79]Campbell v The Commercial Banking Company of Sydney (1879) 2 NSWLR 375 (PC) at 385.
The Privy Council’s reasoning was adopted in New Zealand by Richmond J in Clyde Properties Ltd v Tasker in the context of s 92 of the Property Law Act 1952, which also concerned a mortgagee’s power of sale on default.[80] The approach has subsequently been applied by this Court on several occasions.[81]
[80]Clyde Properties Ltd v Tasker [1970] NZLR 754 (SC) at 758.
[81]Commodore Pty Ltd v Perpetual Trustees Estate & Agency Company of New Zealand Ltd [1984] 1 NZLR 324 (CA) at 328–329 per Cooke J and 342 per Somers J; Parker v Rock Finance Corp Ltd [1981] 1 NZLR 488 (CA) at 494–495 per McMullin J; and Devon Nominees Ltd v Hampstead Holdings Ltd [1981] 1 NZLR 477 (CA) at 486 per McMullin J.
These principles apply equally to the notice a lessor must provide a lessee under ss 245 and 246 of the Property Law Act. In Fox v Jolly, the House of Lords approved of Buckley J’s remarks in Pannell v City of London Brewery Co, which concerned the right of forfeiture under s 14(1) of the Conveyancing and Law of Property Act 1881 (UK) 44 & 45 Vict c 41:[82]
… suppose the notice contains particulars of an alleged breach which is not a breach, why should that be more than matter of defence? Why should it go to defeat the notice as a whole? There does not seem to be any obvious reason why that should be so, and therefore prima facie I should have thought that if the notice required by the statute was good as to part, and sustained as to that part, and was bad as to the rest, the lessor would be entitled to succeed in his action.
[82]Pannell v City of London Brewery Co [1900] 1 Ch 496 at 499–500 per Buckley J; and Fox v Jolly [1916] 1 AC 1 at 15 per Lord Buckmaster.
The relevant requirement in ss 245 and 246 is to “adequately inform” the lessee of “the nature and extent of the breach complained about”.[83] As Buckley J explained in Pannell v City of London Brewery Co:[84]
If a lessor gives a notice specifying two breaches, and specifying a third thing which is not a breach, he has given notice specifying the breach complained of. He has done that and more. He has not only done that which the statute says he must do, but he has done something in addition. He is, therefore, within the words of the Act; and, for the reasons I have given, it seems to me that a notice which contains too much is within the reasoning of the Act.
[83]Property Law Act 2007, ss 245(3)(a) and 246(2)(a).
[84]Pannell v City of London Brewery Co, above n 82, at 500.
This principle should not be taken too far, however. As a Full Court of the Supreme Court of Queensland observed in Clarke v Japan Machines (Australia) Pty Ltd, the Privy Council in Campbell v The Commercial Banking Company of Sydney was only concerned with a small error.[85] The Supreme Court held that whether an error invalidated a notice would always be a matter of degree:[86]
An error in specification of the appropriate sum will not be the end of the matter. A question of fact and degree is involved in every case. The most relevant factors determining validity will be the extent of the error, and the capacity of the notice to give the mortgagor a reasonable opportunity to do what he is obliged to do.
[85]Clarke v Japan Machines (Australia) Pty Ltd [1984] 1 Qd R 404 (SC) at 412.
[86]At 413.
Again, that decision was in the context of a mortgagor default, but the reasoning is equally applicable to ss 245 and 246 of the Property Law Act. There seem to be two kinds of errors: where the quantum is too large (or too small), as in Campbell v The Commercial Banking Company of Sydney; and where several breaches are alleged but some of those are not in fact breaches, as in Pannell v City of London Brewery Co.
In the former kind of case, so long as the error in the notice is sufficiently minor, the lessee can hardly say he or she has not been adequately informed of the nature and extent of the breach. On the other hand, if the error is sufficiently large in magnitude, then it is fair to say that the lessor has in substance failed adequately to inform the lessee of (at least) the extent of the breach.
Where several breaches are alleged, but only some of those are in fact breaches, the lessee will have been adequately informed of the nature and extent of a breach so long as at least one of the alleged breaches is made out.[87] However, there may be situations in which the notice does not clearly identify each breach separately, in which case the lessor will not have adequately informed the lessee of the nature and extent of the breach.
[87]In Jaffe v Premier Motors Ltd [1960] NZLR 146 (SC) at 148, Shorland J distinguished Campbell v The Commercial Banking Company of Sydney in circumstances where a mortgagor default notice erroneously demanded the payment of the principal sum, saying the notice was “not merely a notice which demands an excessive sum”. That decision was based on concerns particular to s 92 of the Property Law Act 1952 and should not be taken as authority for the general proposition that errors of kind should be treated differently from errors of magnitude.
The underlying objective is that the notice ought to enable the recipient to understand with reasonable certainty what he or she is required to do.[88] A notice that fails to do that or which misleads the recipient as to the nature or extent of the breach will be invalid.
[88]Fox v Jolly, above n 82, at 13 per Lord Buckmaster.
We now turn to apply those principles to the present case. The failure to pay rent was separately identified as a breach and as to amount. The fact the PLA notice specified a second breach relating to outgoings, one of which was not in fact a breach, does not invalidate the PLA notice in respect of unpaid rent. The PLA notice was valid in respect of unpaid rent.[89]
[89]On the other hand, the claims for operating expenses and the marketing and promotional funding were not separately identified from the claim for consumables/utilities, as only a total sum was provided for all outgoing said to be owing. Kent Sing was therefore arguably not adequately informed of the nature and extent of those breaches. This neatly demonstrates the point made at [110].
Had Kent Sing paid the full amount of the outstanding rent, JNJ would not have been entitled to re-enter and terminate the Lease. However, it did not do so. JNJ’s re-entry and termination of the Lease pursuant to the PLA notice was therefore lawful.
The Judge concluded that the three pre-conditions to cancellation in the Lease were modelled on s 245 of the Property Law Act and, under s 245(4), the period for remedying the breach can run concurrently with the 10-working day minimum required following service of notice of intention to cancel.[90] This was undoubtedly correct. We therefore agree with the Judge that JNJ did not exercise its cancellation rights prematurely.[91]
[90]JNJ Holdings Ltd v Kent Sing Trading Co Ltd, above n 1, at [86]–[87].
[91]At [91].
Finally, we are satisfied the date for rectification of the breaches in the PLA notice was correctly calculated. A period of time described as ending by a specified day includes that day.[92] Put another way, 25 June 2014 was exactly 10 working days after 11 June 2014 (when the PLA notice was served), which means that 25 June 2014 was not less than 10 working days after service, as prohibited by s 245(3)(c).
[92]Interpretation Act 1999, s 35(3).
We dismiss this ground of appeal.

Costs

The Judge’s costs decision

JNJ as the successful party claimed indemnity costs and disbursements totalling $203,820.59 against Kent Sing, and Mr Thai and Ms Wu as guarantors, and costs on a scale 2B basis plus disbursements totalling $71,637 against General Goods.[93]
[93]JNJ Holdings Ltd v Kent Sing Trading Co Ltd, above n 18, at [13]–[14].

The Judge identified the issues as:[94]
(a)Was JNJ entitled to rely on cl 14.1(b) of the Lease?
(b)If yes, were there any matters justifying a deduction from the claimed amount?
(c)Was JNJ entitled to costs against General Goods on the counterclaim?
(d)If yes, were there any matters that justified a deduction?
[94]At [17].
Clause 14.1(b) of the third schedule to the Lease provided:
14 MISCELLANEOUS
Lessee to Pay Lessor’s Costs
14.1In addition to the Rent and other moneys reserved by this Lease the Lessee shall pay:
…
(b)All costs charges and expenses for which the Lessor shall become liable in consequence of or in connection with any breach or default by the Lessee in the performance or observance of any of the terms covenants and conditions of this Lease.
The Judge was satisfied that cl 14.1(b) was wide enough to cover litigation costs.[95] The proceedings were, of course, an action for recovery of rental payments owing under the Lease.
[95]At [32].
The Judge reviewed the invoices filed in support of the indemnity costs claim and concluded the amount claimed was in parts not properly substantiated and in other parts an inference of unreasonableness was available.[96]
[96]At [44].
A portion of the time claimed was dedicated to the counterclaim and not JNJ’s claim against Kent Sing.[97] The Judge described it as duplication for those costs to be sought against both Kent Sing on an indemnity basis and against General Goods on a scale 2B basis.
[97]At [53].
Finally, the Judge inferred unreasonableness, given the quantum of the costs claimed in light of the judgment sum of $215,048.42.[98]
[98]At [57].
The Judge then decided to undertake a “robust” judgment as to the costs reasonable in the circumstances.[99] Given the deficiencies he identified, he decided a global discount of 70 per cent was appropriate. He therefore awarded JNJ $61,146.18 in costs and disbursements in respect of its claim, and $21,491.10 in respect of the counterclaim.[100]

Kent Sing’s appeal

[99]At [67].

[100]At [69]–[70].

Kent Sing appeals on the basis the Judge failed to take into account the omissions and breaches of discovery. In addition, although the Lease entitled JNJ to “all costs charges and expenses”, it did not expressly grant JNJ the right to recover solicitor indemnity costs. Mr Black also suggested that it was “significantly different” to impose full indemnity costs against a guarantor where the Lease does not make that specifically clear. In his submission, the words “all costs” are insufficient and equivocal.
If the appeal is dismissed, Kent Sing seeks that the costs judgment be quashed and that no costs be awarded to JNJ.

Cross-appeal

JNJ appeals the costs decision on the basis that the 70 per cent discount produced an outcome which left it considerably worse off than if it had simply sought scale 2B costs under which it would have received $97,481.38.[101] Furthermore, even on a robust approach, the 70 per cent discount should not have been applied to disbursements or to scale 2B costs on the counterclaim.

Submissions

[101]This number is slightly different to that contained in Mr Dalkie’s submissions on costs, which assumed only two thirds of the expert fees were recoverable.

Mr Dalkie noted that r 14.2(1)(d) of the High Court Rules specifies the appropriate daily rate as normally being two-thirds of the daily rate considered reasonable in relation to the proceeding. On that basis, Mr Dalkie suggested calculating what the reasonable costs would have been by working backwards from that notional two-thirds basis. Including disbursements, the result is $132,770.38.
In Mr Dalkie’s submission, the Judge erred in comparing the $215,048.42 judgment sum with the $203,802.59 indemnity costs claimed, given that the defence and counterclaim occupied most of the trial time, and JNJ’s claim comparatively little. He said there was no suggestion JNJ had taken unnecessary steps pre-trial, nor contributed unnecessarily to the length of the trial. Furthermore, he said there was no basis to question solicitors’ bills simply because the bill narration was the same as that in counsel’s fee notes.
Finally, in Mr Dalkie’s submission, the Judge’s approach was inconsistent with the approach of the courts on prior occasions.

Analysis

We are satisfied the wide wording of cl 14.1(b) of the Lease entitled JNJ to indemnity costs. The guarantors shared that liability. The guarantee provided that the guarantors were jointly and severally liable to JNJ for the due payment of all moneys to be paid by Kent Sing under the Lease and due performance of all covenants to be performed by Kent Sing under the Lease. There was no ambiguity. We see no merit in Kent Sing’s costs appeal.
The court has a discretion to control the level of indemnity costs it awards.[102] This is usually done by assessing a reasonable allocation of costs based on time taken and the complexity and significance of the work.[103] Given that the obligation to pay indemnity costs is contractual, the court’s discretion is more limited. This Court has observed:[104]
In principle, anything less than a full indemnity for costs properly incurred must leave the indemnitee with part of the liability for which the indemnifier is prima facie responsible … In the absence of a contrary indication it is not to be assumed that the parties intended such a result.
[102]Black v ASB Bank Ltd [2012] NZCA 384 at [77]–[99].
[103]Bradbury v Westpac Banking Corp (2008) 18 PRNZ 859 (HC) at [209].
[104]Beecher v Mills [1993] MCLR 19 (CA) at 25.
This Court has also said it is incorrect to assess reasonableness solely by a comparison of costs charged against the sum at stake.[105]
[105]Edel Metals Group Ltd v Geier Ltd [2018] NZCA 494 at [62].
JNJ’s claim was a simple claim for unpaid rent, operating expenses and consequential losses and expenses. By the time of trial, Kent Sing had filed three amended statements of defence, raising a large number of affirmative defences and, with General Goods, had counterclaimed $727,164.77 (including GST). The trial lasted nine and a half days. JNJ’s case concluded at the end of the third quarter on the third day. Save for closing submissions, the remainder of the hearing was taken up with Kent Sing’s defence and counterclaim, including calling two witnesses under subpoena.
JNJ’s entitlement under the Lease to indemnity costs should have been considered in this context. Mr Dalkie accepted there were legitimate criticisms of his fee notes — GST should not have been included and the narrations were too brief and contained some suggestion of over-recording of time. In saying that, we acknowledge the intensity of effort required immediately prior to and during trial. We accept the Judge was properly concerned at the level of fees but agree with Mr Dalkie that, in the circumstances of a contractual entitlement to indemnity costs, the Judge’s discretion was significantly constrained. Certainly, it cannot be the right result that a party contractually entitled to indemnity costs is awarded a sum less than it would have received on a scale 2B costs award in a case where the actual costs significantly exceeded that sum.
There was also no basis to reduce disbursements by 70 per cent. A disbursement may only be disallowed or reduced if it is considered disproportionate in the circumstances of the proceeding.[106] Recent authority holds that expert fees should be recovered in full, not at a two-thirds rate.[107] Those fees should be reduced only to the extent that they do not reflect time spent preparing and giving evidence, critiquing opposing experts in order to assist counsel to understand the issues and to assist counsel prepare cross-examination. If the expert strays into advocacy, such as by drafting pleadings or writing legal submissions, costs for those activities can be disregarded.[108]
[106]High Court Rules, r 14.12(3).
[107]Air New Zealand Ltd v Commerce Commission [2007] NZCA 27, [2007] 2 NZLR 494
[108]At [62].
Counsel responsibly agreed a practical resolution to the costs appeal once we had made it clear that we saw problems with the Judge’s approach. It was agreed that indemnity costs should be calculated on a scale 2B basis, with an uplift to accommodate the fact that 2B costs are assumed to represent two-thirds of the daily rate considered reasonable. This results in an agreed costs award to JNJ of $105,868.50 plus full disbursements, in total $132,770.38.
We also accept that the 70 per cent reduction should not have been made to JNJ’s costs award in respect of the counterclaim where costs were on a scale 2B basis.
The counterclaim was brought by Kent Sing and General Goods.[109] It was inextricably linked with the success or failure of the defence/set-off because the counterclaim depended on the success of the defence as a starting point. There did not appear to be any dispute that the defence/counterclaim should be treated as consuming six and three-quarter days of the nine-and-a-half-day trial. General Goods is liable to pay costs to JNJ in respect of its counterclaim on a joint and several liability basis with Kent Sing up to a maximum of scale 2B costs and disbursements. The steps in respect of trial preparation (items 30, 31 and 33 of sch 3 to the High Court Rules) are to be pro‑rated to 65 per cent of the time allocation and 6.75 days is allocated for appearance at the hearing on the counterclaim.

Result

[109]And in respect of some of the counterclaims, the second and third appellants.

The application for leave to adduce further evidence in CA34/2018 is declined.
The appeal in CA34/2018 is dismissed.
The appeal in CA529/2018 is allowed. Judgment is entered for the appellant against the respondents in the sum of $132,770,38.
In respect of their counterclaim, General Goods and Kent Sing are jointly and severally liable to pay JNJ costs calculated on a scale 2B basis plus disbursements subject to the amendments set out in [139] of the judgment.
In terms of cl 14.1(b) of the Lease, the appellants in CA34/2018 are to indemnify the respondent for the costs of that appeal and the respondents in CA529/2018 are to indemnify the appellant for its costs of that appeal.

Solicitors:
Dyer Whitechurch, Auckland for Appellant in CA529/2018 and Respondent in CA34/2018

at [63]–[64].

[2019] NZCA 388

27 August 2019