Lough v Taupo Residential Limited
[2018] NZHC 1603
•2 July 2018
IN THE HIGH COURT OF NEW ZEALAND ROTORUA REGISTRY
I TE KŌTI MATUA O AOTEAROA TE ROTORUA-NUI-Ā-KAHU ROHE
CIV-2016-463-89
[2018] NZHC 1603
BETWEEN GARRY CRODSELL LOUGH and
RUTHVEN SCOTT BLAIR KERR as
trustees of the GCL TRUST Appellants
AND
TAUPO RESIDENTIAL LIMITED
First Respondent
RICKY NISBET
Second RespondentCont …
Hearing: 14 March 2018 Appearances:
M D Branch and K F Shaw for the Appellants
T R Mounsey for the First, Second, Third, Fifth, Sixth, and Seventh Respondents
H M Rice and S A Beattie for the Ninth RespondentJudgment:
2 July 2018
JUDGMENT OF WOODHOUSE J
This judgment was delivered by me on 2 July 2018 at 1:00 p.m. pursuant to r 11.5 of the High Court Rules 1985.
Registrar/Deputy Registrar
……………………………………
Solicitors:
Mr M D Branch and Ms K F Shaw, Harkness Henry, Solicitors, Hamilton Mr T R Mounsey, Malcolm Mounsey Clarke, Solicitors, Taupo
Ms H M Rice and Ms S A Beattie, Rice Speir, Solicitors, Auckland
LOUGH v TAUPO RESIDENTIAL LIMITED [2018] NZHC 1603 [2 July 2018]
Cont …
LESLEY KAREN SHARLAND
Third Respondent
COASTAL BUILD (2007) LIMITED
Fourth Respondent
DANIEL RANGI TEWHAITI HOGG
Fifth Respondent
WAYNE LEWIS HARTLEY
Sixth Respondent
RELIABLE ROOFING SOLUTIONS (TAUPO) LIMITED
Seventh Respondent
SCOTT EMPSON
Eighth Respondent
WHAKATANE DISTRICT COUNCIL
Ninth Respondent
[1]This is an appeal against a costs order made in the District Court at Rotorua.1
[2] The appellants brought a claim against the respondents for defective work in construction of a house for the appellants. Judge C J McGuire entered judgment for the appellants against all respondents on the appellants’ claim, against the first respondent on the principal counterclaim of the first respondent, and for the first respondent on an uncontested counterclaim for a small sum.2
[3] Although the appellants succeeded, as the Judge expressly said in his costs judgment, costs were awarded to all of the respondents on the 2B scale increased by 25 per cent for the entire proceeding. The central reason for this conclusion was that the appellants had unreasonably rejected a Calderbank offer for a sum which exceeded the amount of the judgment in favour of the appellants.
The parties
[4] The appellants, represented by Mr Branch and Ms Shaw, are the trustees of a family trust. For convenience, I will refer to the appellants as the plaintiffs.
[5] There were nine defendants. Two of them, the fourth and eighth defendants, took no part in the proceeding, and are not parties to this appeal (although they were recorded as respondents in the notice of appeal). The active defendants/respondents are in two groups, who will be referred to as follows:
(a)The construction defendants: The first to third and fifth to seventh respondents, represented by Mr Mounsey.
(b)The council: The ninth respondent, represented by Ms Rice and Mr Beattie.
1 Lough v Taupo Residential Ltd [2016] NZDC 23352 (the costs judgment).
2 Lough v Taupo Residential Ltd [2016] NZDC 11894 (the substantive judgment).
The proceeding and the substantive judgment
[6] Early in 2012 the plaintiffs and the first defendant (Taupo Residential) entered into a contract for Taupo Residential to build a house for the plaintiffs on land owned by the plaintiffs in Ohope. A building consent was issued by the council in April 2012. The council issued a code compliance certificate on 6 November 2012. Disputes arose over complaints from the plaintiffs of defective work, payments and access to the property.
[7] In June 2013 the plaintiffs obtained a report on the house from a building consultant (the Hamilton report). It identified what the consultant described as “one major item which is more important than all of the rest put together”. This was the fact that the wrong type of building paper had been used underneath cladding, known as palliside cladding, and under corrugated iron, requiring all the cladding and iron to be removed and then replaced after the problem had been rectified (the recladding). Other defective work was identified.
[8] In August 2013 there was a mediation between the plaintiffs and Taupo Residential. It was agreed that Taupo Residential would meet the cost of agreed remedial work, including the recladding. Two recorded terms of the agreement, relating to recladding caused difficulties between the parties and no remedial work was undertaken.3
[9]The plaintiffs commenced proceedings in February 2014. They claimed
$77,926 special damages as the estimated remediation costs and $40,000 for general damages; a quantified total of $117,926. There were further claims for unquantified consequential losses, interest and costs. The claim at trial for remediation costs was
$88,813.89 and the general damages claim had been reduced to $30,000.4 The Judge
noted that there were further claims of $11,491.13 for “remediation costs”, also described as part of the “pre-Court costs”. Quantified legal costs were also sought. The claims against the construction defendants were for breach of contract or
3 The problematic provisions relating to recladding are discussed below at [51]-[53].
4 The substantive judgment at [11].
negligence in relation to construction. The claim against the council was for negligent inspection in relation to the building paper.
[10] Taupo Residential, in its response, admitted liability for some items, including defective building paper. Taupo Residential counterclaimed for $56,600, “plus $100 per day for every day until payment is made”, on the grounds that the plaintiff took possession in breach of the contract, and for $2,446.90 as the balance due on the contract price.
[11] The plaintiffs obtained judgment on their claims for a total of $65,355.75.5 This included $5,000 for general damages.
[12] Taupo Residential’s counterclaim for $56,500, plus $100 a day, was dismissed. Its separate counterclaim for $2,446.90 for the balance owing on the contract was not disputed and judgment for that sum was formally entered for Taupo Residential.
The costs judgment
[13] The Judge’s costs judgment is succinct. The reasons for his conclusion that costs for the entire proceeding should be awarded to the defendants, were as follows:
[8] The central problem for the plaintiffs is that the fifth Calderbank letter dated 21 October 2015, in offering them $100,00 to settle, was an offer that was greater than the amounts awarded in the Court’s judgment of 30 June 2016. Indeed, the fifth Calderbank letter follows earlier Calderbank offers that there [sic] in excess of the judgment amounts.
[9] The fifth Calderbank letter goes into nine pages. It deals extensively with individual issues that comprise the plaintiffs’ claims. It additionally reminds the plaintiffs of their obligation to mitigate their loss and the fact that the palliside cladding may be installed by a licensed building practitioner; that is to say, it does not have to be installed by a person who has a particular certification or qualification to deal with this palliside cladding.
[10] Had the plaintiffs accepted the fifth Calderbank offer, they would have had sufficient funds to carry out all the repairs and still have had approximately $34,000 to apply to their legal costs, accepted that they would have needed to have contracted the services of a less expensive but otherwise competent licensed building practitioner than Cladding Plus Limited about whose pricing the Court had concerns.
5 The substantive judgment at [69], [70], [72], [73] and [78].
[11] The Court therefore concludes that the defendants have done their reasonable best to settle this matter and thus avoid the need for a trial. Those efforts included several Calderbank offers and also included what the defendants believed was a successful judicial settlement conference in late 2014.
The Judge noted cases to which he had been referred on indemnity costs and increased costs.6 He then concluded:
[13] Given what has occurred in this case, I am regrettably driven to the conclusion that this is one of those rare cases where the unsuccessful defendants are entitled to costs and that those costs should be in excess of scale. In reaching this conclusion, I find for the purposes of r 14.6, the plaintiffs unnecessarily continued these proceedings and that they failed without reasonable justification to accept an offer of settlement. Indeed, it is hard to imagine what more the defendants could have done to avoid the Court hearing.
[14] The Judge did not allow a claim by the construction defendants for indemnity costs, although he did not record reasons. There is no cross-appeal against that decision. In relation to increased costs, he rejected a submission that there should be a 50 per cent increase, but allowed a 25 per cent increase to all defendants.7
[15] The entitlement to costs was apportioned between the construction defendants and the council, based on schedules of scale costs submitted by the defendants. The award to the construction defendants was $39,215 plus 25 per cent, and to the council
$34,642.50 plus 25 per cent. The plaintiffs were also ordered to pay the construction defendants $7,270.49 for disbursements. The total liability of the plaintiffs for costs and disbursements was, therefore, $99,592.37.
[16] The overall result for the plaintiffs, setting off the net judgment sum in their favour, of $62,908.858 from the liability for costs and disbursements, is a deficit of
$36,683.52.
6 Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] 3 NZLR 400; Weaver v HML Nominees Ltd [2016] NZHC 473; Reynolds v Calvert [2015] NZHC 870.
7 On the grounds that in Weaver v HLM Nominees Ltd, above n 6, in which a 50 per cent increase was allowed, the “unreasonableness” was more significant than had occurred in the present case.
8 $65,355.75 less the undisputed contract balance of $2,446.90.
The issues on appeal
[17]The issues of consequence may be summarised as follows:
(a)Were the plaintiffs or the defendants the successful party?
(b)Was an offer made by the defendants on 7 July 2015 (the July offer), and repeated in October 2015, an offer to which r 14.11(3) of the District Court Rules 2014 applies?9 Rule 14.11(3) provides that costs may be recovered by an unsuccessful party if, amongst other things, the unsuccessful party made an offer, as defined in r 14.10, to the successful party which exceeded the amount of the successful party’s judgment.
(c)If the July offer was an offer to which r 14.11(3) applies, was there any appealable error by the Judge in awarding costs to the defendants for steps taken by them in the proceeding before the July offer was made?
(d)If there was an appealable error by the Judge, should the costs award be modified? The arguments for the parties ranged from an argument for the plaintiffs that costs should have been awarded to the plaintiffs for the entire proceeding and an argument for the construction defendants that, even if r 14.11(3) did not apply to the July offer, or any other offer, the construction defendants were, and remain, entitled to costs for the entire proceeding with a 25 per cent increase.
Costs jurisdiction, rules and principles
[18] All matters relating to costs are at the discretion of the court.10 In consequence, on an appeal, the appellate court should not interfere unless satisfied that the judge who made the order, in exercising the discretion, acted on a wrong principle, or failed
9 All further references to rules in this judgment, except in citations, are to the District Court Rules 2014. With one exception, noted later, the numbering of all rules and sub-rules referred to is the same as the numbering of the High Court Rules 2016.
10 Rule 14.1(1).
to take into account some relevant matter, or took account of some irrelevant matter, or was plainly wrong.11
[19]Rule 14.1(2), prescribing the discretionary jurisdiction, states that rr 14.2 to
14.10 are subject to the discretion. But that also is qualified. The new costs regime was introduced in 2000. In a decision in 2002 the Court of Appeal said that it resulted in “a strong implication that a Court is to apply the regime in the absence of some reason to the contrary”.12 This statement was approved by the Supreme Court in Manukau Golf Club Inc v Shoye Venture Ltd.13
[20]The rules and principles of most relevance on this appeal are as follows:
(a)The primary rule is that “the party who fails with respect to a proceeding … should pay costs to the party who succeeds”;14 that is, costs follow the event. The primacy of this rule has been emphasised in the Supreme Court and Court of Appeal in different ways: “the loser, and only the loser, pays”;15 “[a] fundamental principle applying to the determination of costs in all the general courts in New Zealand is that costs follow the event”;16 “the paramount rule that costs should follow the event”.17
(b)The leading cases emphasise the general need to determine who succeeded and who lost in a straightforward way based on the formal result. The Court of Appeal of England and Wales, dealing with a money claim, said: “In deciding who is the successful party, the most important thing is to identify the party who is to pay money to the other.
11 Shirley v Wairarapa District Health Board [2006] NZSC 63, [2006] 3 NZLR 523 at [15].
12 Mansfield Drycleaners Ltd v Quinny’s Drycleaning (Dentice Drycleaning Upper Hutt) Ltd (2002) 16 PRNZ 662 (CA) at [27]. Followed in Glaister v Amalgamated Dairies Ltd [2004] 2 NZLR 606 (CA) at [19].
13 Manukau Golf Club Inc v Shoye Venture Ltd [2012] NZSC 109, [2013] 1 NZLR 305 at [7]. And see Shirley v Wairarapa District Health Board, above n 11, at [15]-[17].
14 Rule 14.2(1)(a).
15 Shirley v Wairarapa District Health Board, above n 11, at [19].
16 Manukau Golf Club Inc v Shoye Venture Ltd, above n 13, at [8].
17 Water Guard NZ Ltd v Midgen Enterprises Ltd [2017] NZCA 36 at [13], affirmed in Midgen Enterprises Ltd v UV Water Systems Ltd [2017] NZSC 68 at [7]-[8].
That is the surest indication of success and failure.”18 When the claim is not for money, or when there is an unsuccessful counterclaim, the same principle applies; the party who fails is the party against whom judgment is entered.
(c)The fundamental rule that costs follow the event is not absolute, but it should not be departed from “unless there are exceptional reasons”.19
(d)“So far as possible the determination of costs should be predictable and expeditious.”20
(e)Rule 14.6 provides that, despite rr 14.2 to 14.5, increased or indemnity costs may be awarded on specified grounds. The ground adverted to by the Judge is r 14.6(3)(b)(v), as follows:
failing, without reasonable justification, to accept an offer of settlement, whether in the form of an offer under rule 14.10 or some other offer to settle or dispose of the proceeding;
(f)Rule 14.7 provides that, despite rr 14.2 to 14.5, the Court may refuse to make an order for costs, or may reduce the costs otherwise payable under those rules, on specified grounds. The ground of relevance on the appeal is as follows:21
the party claiming costs has contributed unnecessarily to the time or expense of the proceeding or step in the proceeding by—
…
(v) failing, without reasonable justification, to accept an offer of settlement, whether in the form of an offer under rule 14.10 or some other offer to settle or dispose of the proceeding; …
18 A L Barnes Ltd v Time Talk (UK) Ltd [2003] EWCA Civ 402, [2003] All ER (D) 391 at [28]; applied in Water Guard NZ Ltd v Midgen Enterprises Ltd, above n 17, at [13].
19 Shirley v Wairarapa District Health Board, above n 11, at [19].
20 Rule 14.2(1)(g).
21 Rule 14.7(e)(v). The corresponding High Court rule is r 14.7(f)(v).
(g)In the context of the costs rules and principles, and unless r 14.11(3) applies (as discussed next), r 14.7(e)(v) is the rule that should generally be applied against a successful party if there has been an unreasonable failure to settle.22
(h)Whether the response of the party to the offer is unreasonable must be assessed having regard to the conduct and knowledge of that party at the time the offer is made.
(i)Rule 14.11 makes provision for an award of costs to an unsuccessful party who has made an offer as defined in r 14.10; an offer commonly referred to as a Calderbank offer. The two rules are as follows:
14.10Written offers without prejudice except as to costs
(1)A party to a proceeding may at any time make to any other party to the proceeding a written offer that—
(a)is expressly stated to be without prejudice except as to costs; and
(b)relates to an issue in the proceeding.
(2)The fact that the offer has been made must not be communicated to the court until the question of costs is to be decided.
14.11Effect on costs
(1)The effect (if any) that the making of an offer under rule 14.10 has on the question of costs is at the discretion of the court.
(2)Subclauses (3) and (4)—
(a)are subject to subclause (1); and
(b)do not limit rule 14.6 or 14.7; and
(c)apply to an offer made under rule 14.10 by a party to a proceeding (party A) to another party to it (party B).
(3)Party A is entitled to costs on the steps taken in the proceeding after the offer is made, if party A—
22 Water Guard NZ Ltd v Midgen Enterprises Ltd, above n 17, at [13], expressly approved in Midgen Enterprises Ltd v UV Water Systems Ltd, above n 17, at [7].
(a)offers a sum of money to party B that exceeds the amount of a judgment obtained by party B against party A; or
(b)makes an offer that would have been more beneficial to party B than the judgment obtained by party B against party A.
(4)The offer may be taken into account if party A makes an offer that—
(a)does not fall within subclause (3)(a) or (b); and
(b)is close to the value or benefit of the judgment obtained by party B.
(j)If rr 14.11(3) and (4) do not apply, an award of costs to the unsuccessful party would involve exercise of the Court’s discretion contrary to principle unless there are exceptional reasons.23
(k)Rule 14.11(3) (or (4)) cannot apply unless the value of the offer as a whole can be quantified to establish that it is more than (or close to) the value of the judgment obtained by the successful party. That obviously is required if paragraph (b) applies. But it will also be required if, for example, party A has offered a sum of money, in a claim for a sum of money, but the offer includes conditions imposing an obligation on party B, beyond obligations of an essentially procedural nature to secure a binding end to the proceeding (such as filing a notice of discontinuance). Paragraph (a) cannot be read as permitting the amount of the offer to be put in the balance if its true value to Party B will be diminished by conditions which are not expressed in money terms and diminution in value has not been, or cannot be, quantified. An offer of a sum of money may not amount to a Calderbank offer at all if it is a conditional offer and takes the offer beyond the definition in cl 14.10.24
23 Shirley v Wairarapa District Health Board, above n 11, at [19].
24 Rapana v McBride Street Cars Ltd [2007] DCR 551 (HC) at [22]; Johns v Johns HC Auckland CIV-2000-404-5121, 23 August 2007 at [11].
Analysis of the relevant issues
Who succeeded?
[21] The defendants argued that the defendants were the successful parties. This was contrary to the fact that judgment was entered for the plaintiffs, and contrary to the express conclusion of the Judge. I agree with the Judge, and reject the defendants’ arguments, for the reasons that follow.
[22] The thrust of the submissions for the defendants were as follows: liability to the plaintiffs was not in issue; the real issue concerned the cost of the remedial works and therefore the damages to be paid to the plaintiffs; and the defendants succeeded because the Judge upheld the defendants’ argument that the work could be carried out at a cost less than the cost advanced by the plaintiffs.
[23] An argument along those lines is contrary to principle; the defendants are the parties held liable to make payment to the plaintiffs. I reject it for that reason.
[24] I also reject the factual premise of the argument. It is correct, as the construction defendants agreed, that approximately two weeks before the hearing they formally acknowledged liability, at least in relation to most categories of defective work or other bases for liability. And, as earlier noted, Taupo Residential had admitted liability for some items, including the recladding, in its original response to the claim.
[25] The Judge recorded that the council admitted negligence in inspections. It appears that that admission of liability only occurred part way through the hearing.
[26] Once liability was admitted, a substantial remaining argument between the parties was the cost to carry out the remedial work. In relation to that specific argument, the defendants were successful. But belated admissions of liability, and in particular by the council, do not make the defendants successful parties because of their success on the argument about cost. In any event, it was not simply an argument about cost per se. There also was an argument whether the plaintiffs had an entitlement, and the defendants therefore had a liability, for the work to be carried out by a licensed and experienced palliside cladding contractor, or whether the plaintiffs’
entitlement was limited to a qualified builder, but not one with a particular certification or qualification to deal with palliside cladding.
[27] Quite apart from the dispute over the necessary qualifications of the contractor, there were other liability issues of consequence on which the plaintiffs plainly succeeded: the plaintiffs’ claim for general damages, an affirmative defence by defendants of a failure by the plaintiffs to mitigate loss, and the counterclaim by Taupo Residential for a substantial sum.
[28] This review of some of the matters in issue between the parties, beyond the question as to how much remediation would cost, support the conclusion, based on principle, that the successful party was the plaintiffs. This brief discussion also illustrates the general importance of adhering to the principles that costs follow the event unless there are exceptional reasons, and that, so far as possible, the determination of costs should be predictable and expeditious.
Did r 14.11(3) apply?
[29] Central to the Judge's costs decision was his conclusion that the defendants had made an offer of settlement giving rise to the defendants' presumptive entitlement to costs under r 14.11(3)(a). The Judge's reasons for his decision, overall, extend beyond that rule. But the rule is plainly the foundation for his conclusion that costs should be awarded against the plaintiffs notwithstanding the plaintiffs’ success. The Judge had noted r 14.11, with other rules, in summarising the submissions for the construction defendants. He did not expressly refer to the rule in his reasons, but the fact that that rule was being applied is apparent from the discussion.25
[30] The Judge identified an offer from the defendants to the plaintiffs of 21 October 2015 as the relevant offer. The Judge had earlier noted submissions of Mr Mounsey giving emphasis to this letter. This letter repeated the July offer for the same sum. On this appeal, Mr Branch and Ms Rice were in agreement that, in terms of offers requiring consideration under r 14.11(3) the July offer is the relevant offer. Mr Mounsey submitted that there were earlier offers by the defendants which would
25 See in particular [8] and [13] of the costs judgment, cited above at [13].
have produced a better result for the plaintiffs than what they achieved at trial. There were fairly extensive submissions, on both sides, relating to a series of earlier offers, as well as the result of a judicial settlement conference. I am satisfied that the July offer, and its renewal in October 2015, are the ones to consider to determine whether there was an error of principle by the Judge in relation to r 14.11(3).
[31] In my judgment neither the July offer, nor the October offer, meets the definition in r 14.10. The offers were without prejudice except as to costs. However, although they related to an issue in the proceeding, in terms of r 14.10(1)(b), they also related to matters that went well beyond the issues in the proceeding. They sought to include, as parties to the proposed settlement agreement, persons who were not parties to the proceeding. These features are explained below. For these reasons r 14.11(3) could not apply.
[32] I am also satisfied that r 14.11(3) does not apply because of the effect of a condition in the defendants’ offer. The condition, contained in draft terms of settlement, is as follows:
The claimants further agree to indemnify the parties to this agreement against any claim brought against that party in relation to or in anyway [sic] arising directly or indirectly out of the subject matter of the claim. For the sake of clarity, the indemnity extends to all costs (on a solicitor/client basis) and disbursements incurred in defending such claim(s).
[33] “The claimants”, as defined, were not only the plaintiffs but also “Garry Lough and Judy Lough personally as occupiers of the property, beneficiaries of the Trust and claimants for general damages”. Garry Lough was one of the two plaintiffs (and appellants) as trustees of a family trust. Judy Lough is Mr Lough’s wife. She was not a party to the proceeding.26 “The parties” were not defined in the introductory provisions, but plainly mean the construction defendants and the council.
[34] This condition, in my judgment, meant that it was not possible to conclude that the value of the offer made by the defendants exceeded the judgment obtained by the plaintiffs. This is because the value of the offer was diminished by an unquantifiable
26 General damages were claimed for Mrs Lough as well as Mr Lough but plainly were not recoverable by a person who was not a plaintiff, as the Judge said: the substantive judgment at [75].
liability arising from the indemnity. And the quantum of the burden was increased because the defendants sought to impose it not only on the plaintiffs, as the owners of the house in question, but on the occupants, one of whom was not a party in any capacity and not a trustee.
[35] The defendants argued that this condition was not material because the plaintiffs’ only concern was the amount of money offered by the defendants. I do not agree. If there were evidence that the plaintiffs, and Mr and Mrs Lough personally, were indifferent to the proposed indemnity sought from them, that might have been sufficient to conclude that the value of a payment by the defendants of $100,000 was not materially diminished by the indemnity. But the evidence is to the opposite effect. Negotiations over terms of settlement, over a lengthy period, make clear that an onerous indemnity, as sought by the defendants, was of material concern to the plaintiffs and to Mr and Mrs Lough personally. Following earlier offers, other terms of settlement proposed by the defendants had also been rejected by the plaintiffs, in addition to rejection of the settlement sum offered. The defendants, in the July offer, deleted some of those conditions, but the indemnity remained. The plaintiffs’ objection to the indemnity was confirmed after the offer of 21 October 2015, to which the Judge referred. The plaintiffs’ solicitors responded to the 21 October offer with a counter-offer on 29 October 2015 to settle all claims for a payment of $124,000 and on terms contained in a draft attached. The draft terms of settlement excluded any indemnity as sought by the defendants. It also excluded Mr and Mrs Lough in their personal capacities as parties to the agreement.
[36] For these reasons I am satisfied that there was an error of principle by the Judge in concluding, in substance, that r 14.11(3) applied so that costs could be awarded to the unsuccessful defendants.
[37] There was a further issue in respect of r 14.11(3). The plaintiffs argued that, even if r 14.11(3) did apply, there was an error by the Judge in awarding costs to the defendants for the entire proceeding. This was because costs recoverable under r 14.11(3) are costs of the party making the offer on steps taken in the proceeding after the offer is made. Ms Rice, for the council, quite properly conceded that point. I am satisfied that there was error by the Judge in this regard.
Reassessment of costs
[38] Given the conclusion that r 14.11(3) does not apply it is necessary to reassess the competing costs application. There are two broad issues:
(a)Are there exceptional circumstances justifying a costs order in favour of the unsuccessful defendants?
(b)If not, was there conduct of the plaintiffs justifying an order under r 14.7, reducing or refusing costs otherwise recoverable by the plaintiffs as the successful party?
[39] The Judge’s conclusion was that the plaintiffs “unnecessarily continued these proceedings and that they failed without reasonable justification to accept an offer of settlement”.27
[40] On this appeal, Ms Rice submitted that the Judge’s conclusion is underpinned by the following findings and observations in the substantive judgment:
[48] The plaintiff did not agree to the proposals put forward by the first defendant for remediation and it is now clear that the plaintiff is intent on having Cladding Plus do the re-cladding. It was acknowledged at the hearing that this entity has been engaged to do the work. Right up until these proceedings were issued and beyond, there has objectively been a remarkable amount of dialogue between the parties and genuine attempts to resolve matters. This case is assuredly, therefore, not one of a “dodgy” builder wanting to get away with a substandard job. What appears to have finally stood in the way of resolution is the plaintiff’s aversion to any entity other than Cladding Plus Ltd doing the remedial work in spite of the fact that clause 11(a) of the mediation agreement provided that the parties would appoint either a contract supervisor or an experienced palliside service provider.
[49] As Ms Rice pointed out in final submissions, the manufacturer’s brochure relating to palliside has in bold type in its introductory pages, “Palliside weatherboards are quick and easy to install” and paragraph 16.1 of the same brochure is headed “Installation skill level requirements”:
“Installation of palliside weatherboards and accessories supplied by Dynex Extrusions Ltd and the building contractor must be completed by tradespersons with an understanding of palliside weatherboard installation in accordance with the instructions given within the palliside cladding system technical literature and this appraisal.”
27 The costs judgment at [13]. This paragraph is recorded above at [13].
[50] What is significant about this is that the person installing the weatherboard does not have to be a palliside service provider nor even a licensed building practitioner.
[51] Mr de Bruin’s company, Cladding Plus, has been on the sideline of this build since early 2013. In the course of his evidence, I detected a certain vagueness, even sheepishness, in his answers when questioned closely on the way he had priced this work and justified the steady increase over Cladding Plus’ various quotes from 2013 onwards. For example, he never explained why his mileage charge is $1.20 per kilometre when compared with the Inland Revenue allowed rate of 74 cents, and if one looks at his “across the board” increases in price, one concludes that a percentage increase has been applied rather than attention given to whether or not there are justifiable increases for each component of his quote. As defence counsel pointed out, both looked at through the lenses of both contract and tort, damages, both general and compensatory, must pass the reasonable test. I have concluded that so far as assessment of quantum of the remedial work is concerned, the evidence of Mr Hunt is more reliable. In essence, his answers were careful and thought out. Finally, the fact that Mr Hunt is also a quality surveyor adds to the impact of his evidence.
In discussing Mr Lough’s claim for general damages for stress, the Judge also said:28
[77] ... And, his actions and responses following the Hamilton report and following the mediation in effectively being unable to accept any remedy other than that offered by the Cladding Plus, have contributed to his stress.
[41] There is an important distinction between assessment of the reasonableness of the plaintiffs’ approach to relevant settlement negotiations and offers, and the Judge’s conclusion that the plaintiffs were wrong to insist on the work being done by Cladding Plus. The latter is an assessment that was made following trial. And in large measure it was based on the Judge’s assessment of the evidence from Mr de Bruin, the sole director of Cladding Plus. The reasonableness of the plaintiffs’ approach to settlement has to be judged in light of information known to the plaintiffs, and in substance known to Mr Lough, at the time of the relevant offer. The relevant time is from July 2015 and, in particular, given the Judge’s costs judgment, in October 2015.
[42] The determinations required to be made on appeal as to the plaintiffs’ knowledge and conduct at the time, are determinations of fact, not a review of the Judge’s exercise of a discretion. Judges on appeal are bound to come to their own
28 The “Hamilton report” referred to by the Judge was the report obtained by the plaintiffs shortly before the mediation and noted above at [7].
conclusion on the facts. In doing so, appellate judges may attach such weight as they consider appropriate to the trial judge’s factual findings.29
[43] In this case I do attach weight to the Judge’s assessment that Mr Lough, who controlled all relevant matters for the plaintiffs, was somewhat obdurate. But that is by no means determinative. The critical conclusions of the Judge in this context were the adverse findings in relation to Mr de Bruin’s evidence, not the reasonableness of the approach to settlement of the plaintiffs. On the latter point, it is of some consequence that the Judge said, in that regard, and in the same passage relied on by the defendants on appeal: “Right up until these proceedings were issued and beyond, there has objectively been a remarkable amount of dialogue between the parties and genuine attempts to resolve matters.”30
[44] Those observations of the Judge plainly apply to responses on both sides. They are not indicative of unreasonableness on the part of the plaintiffs sufficient to create exceptional circumstances to justify a costs order in favour of the unsuccessful defendants. And, of course, the Judge was not assessing costs on that basis, but on the implicit conclusion that there had been an offer from the defendants which exceeded the final judgment sum.
[45] There are two further considerations which reinforce a conclusion that the plaintiffs’ response to the renewed offer in October 2015 was not so unreasonable that costs to the successful plaintiff should not only be refused, but that costs should be awarded to the unsuccessful defendants.
[46] First, it was not unreasonable for the plaintiffs to approach settlement offers on the basis that the construction defendants had done a bad job, particularly relating to the cladding problem, notwithstanding that the contractors who did the actual work were, presumably, qualified builders in a general sense. It also was not unreasonable for the plaintiffs to approach settlement offers on the basis that the remaining defendant, the council, who would be required to carry out inspections of the remedial
29 Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 at [5] and [16].
30 The substantive judgment at [48] (emphasis added).
work, had not competently carried out the original inspections. The important question, assessing the matter at the time, is why it was unreasonable for the plaintiffs to have wanted to engage a contractor who they believed had expertise with palliside cladding. There does not appear to be any factual finding that the plaintiffs were wrong to regard Mr de Bruin, at the time, as a technical expert. The Judge’s clear findings against Mr de Bruin related to his pricing, but that concerns a materially different point.
[47] The second consideration is that the plaintiffs did not fail to engage in a reasonable way in response to the October 2015 renewal of the July offer. The plaintiffs responded to the defendants’ offer to settle for $100,000 with an offer to settle for $124,000, as well as deletion of the onerous indemnity and Mr and Mrs Lough as parties in their personal capacities.31
[48] Was a counter-offer for an extra $24,000, and deletion of the indemnity, an unreasonable response? Deletion of the indemnity was not at all unreasonable. In relation to the money, assessed simply as a percentage, the counter-offer was almost 25 per cent more than the defendants’ offer. But the percentage difference is only one factor in an assessment of the reasonableness of the response at the time. In absolute terms the difference is not a large sum. It could reasonably have been assessed by the plaintiffs as a modest premium to avoid the problems that had arisen using a qualified builder, but one who was not certified for the particular products.
[49] In the paragraphs from the substantive judgment recorded above, the Judge referred to the brochure from the manufacturer of palliside weatherboards, quoted an extract from it, and concluded from this that the weatherboards did not have to be installed by a palliside service provider or even a licensed building practitioner. For the purpose of an assessment of reasonableness in relation to settlement offers, I am satisfied that it would not have been unreasonable for Mr Lough to conclude from the brochure that expertise was required and that a general qualification as a builder would not be sufficient. This is because the brochure says that “Installation … must be
31 In the circumstances recorded above at [35].
completed by tradespersons with an understanding of palliside weatherboard installation …”.
[50] It may also be said that, at the time of the October settlement negotiations and following, there was a degree of unreasonableness on the part of the defendants in failing to bridge the small gap between their offer of $100,000 and the counter-offer of $124,000. It was not much of a gap to be bridged by seven defendants.
[51] At [48] of the substantive judgment, the Judge referred to the mediation between the plaintiffs and the first defendant in 2013, before the proceedings were issued, and was critical of the plaintiffs in that regard. It is not apparent that this is a factor taken into account by the Judge in his costs determination, but it is a matter referred to by the defendants.
[52] I am not persuaded that it has any bearing on the costs issues. In my opinion, two terms of the mediation agreement, in relation to the recladding issue, were deficient and it is these which gave rise to problems.32 The relevant provisions are as follows:
(a)To appoint either a contract supervisor or an experienced palliside service provider …
(f)Taupo Residential [the first defendant] will complete the installation as agreed with the appointed person in (a).
[53] There was no express provision nominating who would “appoint either a contract supervisor or an experienced palliside service provider”, or a separate provision for resolving a dispute if the intention was that both parties would make the necessary decisions arising from sub-paragraph (a). It may also be noted that the effect of sub-paragraph (f), when read in relation to sub-paragraph (a), is unclear.
[54] For those reasons I am satisfied that this is not a case where, in the absence of an offer from the defendants to which r 14.11(3) applies, costs should be awarded to the unsuccessful defendants. The plaintiffs’ conduct in relation to settlement
32 See above at [8].
negotiations was far from exceptional. What occurred, on both sides, was common- place.
[55] What therefore remains to be considered is whether there is any principled basis, under r 14.7, for reducing or refusing costs otherwise recoverable by the plaintiffs. The cases on appeal for all of the parties necessitated review of a substantial amount of documentary evidence relating to negotiations between the parties over an extended period, and including the plaintiffs’ conduct following a judicial settlement conference. Reviewing matters in this much broader context, I have concluded that, although aspects of the negotiations on both sides were common-place, rather than exceptional, this is a case which should have settled and that Mr Lough’s obdurate approach contributed to the fact that it did not. Making an assessment in light of the relevant evidence, the submissions and the discussion to this point, I am satisfied that the 2B costs the plaintiffs would otherwise have been entitled to recover should be reduced by 50 per cent.
Quantum of costs
[56] The submissions for the plaintiffs on appeal included a schedule with a calculation of 2B costs for the plaintiffs in the District Court at a total of $27,617. The defendants did not take issue with that calculation. There will accordingly be judgment for the plaintiffs for costs in a rounded sum of $13,800.00.
[57] The plaintiffs’ schedule on appeal did not record any claim for disbursements. In the District Court the plaintiffs had claimed disbursements totalling $5,690. This included $90 for filing an application for a default judgment. This would not appear to be a disbursement recoverable from the active defendants. The remaining items are for the original filing fee and hearing fees. These are recoverable. The plaintiffs are allowed $2,800, being half of those disbursements.
Result
[58] The appeal is allowed. The costs judgment in the District Court is set aside. There is an order that the defendants pay the plaintiffs’ costs and disbursements in a total sum of $16,600.00.
[59] Liability for costs and disbursements as between the defendants, shall be apportioned in the percentages recorded in the substantive judgment at [92].
[60] The plaintiffs are entitled to costs on the appeal on a 2B basis and reasonable disbursements. Any quantum issue shall be determined by the Registrar.
Woodhouse J
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