New Zealand Carbon Farming Limited v Mighty River Power Limited
[2015] NZHC 2894
•19 November 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-1630 [2015] NZHC 2894
UNDER Section 24C(4) of the Judicature Act 1909 BETWEEN
NEW ZEALAND CARBON FARMING LIMITED
First Plaintiff
AND
NZCF LAIDMORE LIMITED Second Plaintiff
AND
MIGHTY RIVER POWER LIMITED Defendant
On the papers Appearances:
CP Browne for the plaintiffs
JE Hodder QC and DT Street for the defendantJudgment:
19 November 2015
JUDGMENT (NO. 2) OF TOOOGOOD J [COSTS]
This judgment was delivered by me on 19 November 2015 at 3:30 pm
Pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar
NZ CARBON FARMING LTD v MIGHTY RIVER POWER LTD [2015] NZHC 2894 [19 November 2015]
Introduction
[1] On 9 June 2015, I delivered a judgment in this proceeding and reserved costs.1 The parties were unable to agree on costs and they have filed and exchanged memoranda.
[2] The case concerned a dispute between two plaintiff companies (together, “NZCF”), who are the owners of the Hawarden Forest in North Canterbury (“the forest”), and Mighty River Power Limited (“MRP”), an electricity generation, wholesaling and retailing company. At issue was the interpretation and operation of an emissions reduction purchase agreement (“ERPA”) between them dated 12
January 2012 for the sale and purchase of New Zealand Units (“NZUs”) under the greenhouse gas Emissions Trading Scheme (“ETS”). The ETS is implemented, operated and administered under the provisions of the Climate Change Response Act 2002.
The issues and the Court’s findings
The issues
[3] The parties identified six issues arising under the ERPA, namely:
(a) An issue concerning the date on which payments fall due under the agreement (“the payment date issue”).
(b)A dispute over MRP’s entitlement to set off or withhold what MRP claims to have been an overpayment for 2013 against the sum payable to the plaintiffs for the 2014 delivery of units (“the set-off issue”).
(c) An issue concerning the disclosure of documents and information by the plaintiffs to MRP to enable MRP to verify the plaintiffs’ claims for payment for units delivered under the agreement (“the document
obligation issue”).
1 New Zealand Carbon Farming Limited v Mighty River Power Limited [2015] NZHC 1274 (“the judgment”).
(d)A question about whether MRP is required to purchase only those NZUs which can be attributed to the forest’s carbon performance in the prior year, or whether it is obliged to take additional units received from the mandatory re-assessment of carbon performance at the end of a five-year commitment period (“the wash-up issue”).
(e) Whether the minimum and maximum volumes provided for in the agreement should be scaled up as a result of the introduction of a change in the accounting mechanism for the calculation of units to be delivered and paid for under the agreement (“the scale-up issue”).
(f) Whether MRP was entitled to rectification of the agreement if issue (e) was decided against it (“the rectification issue”).
Payment date issue
[4] The payment date issue arose because the agreement did not expressly reflect the agreed mutual intention of the parties which was that the invoice for MRPs payments under the ERPA would be paid by 20 March in each year. The disagreement between the parties was about whether NZCF was required to seek rectification of the clause, which it had not done in its pleaded case, or whether the issue could be resolved by a principled interpretation of the provision. It was held that there was a tenable interpretation of the relevant provision meaning that in
respect of an invoice rendered in early March, payment was due on the 20th day of
the same month.
[5] It would not be realistic to find that one party succeeded on that point and that the other did not; the Court simply gave a ruling which met the mutual needs of the parties.
Set-off issue
[6] On the set-off issue it was held that MRP was, and is, entitled to withhold amounts mistakenly paid for units that it was not required to purchase under the
agreement and set them off against future payments under the agreement. It was held that the relevant clause did not exclude MRP’s ability to withhold or set-off under common law, equity or otherwise. The defendant was the successful party on that issue.
Document disclosure issue
[7] On the document disclosure issue, it was held that NZCF must provide a copy of the emissions return form provided to the Crown as required by clause 2.1(b)(ii) of the ERPA, but that it is not required to provide the further information sought by MRP. The plaintiffs succeeded on that issue.
Wash-up claim
[8] On the wash-up claim, it was held that NZCF was obliged to provide, and MRP was obliged to buy, the units transferred to NZCF by the Crown, pursuant to the filing of the mandatory emissions return at the conclusion of the first five-year ETS commitment period. NZCF was the successful party on that issue. The value of the sum at stake was not insignificant: $420,000 and interest.
The scale-up issue
[9] The scale-up issue was the most financially significant of the matters to be determined. Had the plaintiffs succeeded in their claim on that issue, the value of the units MRP was required to purchase under the ERPA would double over the life of the 15-year agreement. It was held that the minimum and maximum volumes provided for in the ERPA should not be scaled up, because the accounting mechanism for the calculation of units to be delivered and paid for was in operation at the date of the agreement. NZCF was unsuccessful on this issue.
MRP’s claim for costs
[10] MRP applies for an order for payment of $205,521 in costs and $35,308.96 in disbursements. Its claim is based on the following propositions:
(a) The Category 2B scale should be applied.
(b) MRP succeeded on the most significant issue in the proceeding.
(c) The case was of such complexity as to justify certification for payment of fees in respect of second counsel.
(d)The plaintiffs refused a Calderbank offer by MRP to settle the proceeding, and continued to pursue the scale-up claim notwithstanding MRP’s expressed view that the claim could not succeed.
(e) An uplift of $150,000 should be added to the scale costs.
The Calderbank offer and the plaintiffs’ pursuit of the scale-up claim
[11] The statement of claim was filed on 1 July 2015. It addressed the wash-up claim and challenged MRP’s withholding of payments due under the agreement and its claim to a set-off. On 10 July 2014, MRP notified the plaintiffs of its verification claim. On 8 August 2014, the plaintiffs filed an amended statement of claim incorporating its claim to increased payments under the scale-up provision.
[12] MRP’s Calderbank offer was made in a letter dated 7 October 2014. MRP’s solicitors said that, in return for the abandonment of the plaintiffs’ scale-up claim, MRP would:
(a) pay the amounts claimed under the wash-up provisions; (b) not pursue its set-off claim;
(c) not pursue its claim for further verification of the payments claimed by NZCF; and
(d)agree that payment should be made on the 20th of March following the provision of an invoice in that month.
[13] The offer was open for acceptance within three days. In general terms, the outcomes proposed by MRP reflected the outcomes contained in the judgment.
The plaintiffs’ position
[14] Opposing MRP’s costs claim, the plaintiffs accept that costs should be calculated on a Category 2B basis and that a claim for the costs of second counsel is appropriate.
[15] The plaintiffs say, however, that both sides succeeded on aspects of the claim and that MRP defaulted on its discovery obligations. Their primary position is that costs should be left to lie where they fall. Alternatively, they argue that if MRP is entitled to costs, certain costs claims should be allowed to the plaintiffs and deducted from any award to the defendant. It is convenient to deal with that proposition first.
Deduction from plaintiffs’ costs – frustration of the contractual dispute resolution procedure
[16] The plaintiffs claim that MRP frustrated the use of the alternative dispute resolution procedure provided in the agreement, requiring the plaintiffs to issue proceedings to resolve the dispute which they argued was the most pressing, and on which they succeeded; namely, the refusal by MRP to pay the $420,000 which remained unpaid from the 2014 invoice and which sum had been withheld by MRP on the basis of its claim to a set-off. For this reason, NZCF argues that because of MRP’s wrongful refusal to participate in the contractual dispute resolution procedure, MRP should not be entitled to costs on the initial stages of the proceeding up to the first case management conference.
[17] I do not accept that proposition. The argument that MRP had no right to withhold the set-off amount which it had claimed in respect of the 2014 payment was rejected in the judgment. It was held that the relevant clause was a permissive clause entitling MRP to withhold and set-off a portion of the purchase price otherwise owing in certain circumstances. It was found also that there was no express provision excluding MRP’s ability to withhold or set-off a payment due under
common law, equity or otherwise.2 The dispute resolution provisions of the agreement were held to require only an initial attempt to resolve any dispute expeditiously by prompt reference to the parties’ respective representatives. That having been done, MRP was not obliged to submit to the remainder of the dispute mechanism, which was optional.3
NZCF’s claim for costs for discovery and rejection of MRPs discovery costs claim
[18] The plaintiffs say that MRP withheld numerous documents which they considered relevant to the issues in the proceeding, as a result of which they were required to apply for particular discovery. MRP eventually consented to an order and the documents were supplied. The plaintiffs say that:
(a) on 14 October 2014 they made further complaints to MRP about discovery but filed their briefs of evidence in accordance with the timetable, in any event;
(b)on 24 October 2014 and 31 October 2014 respectively, MRP disclosed in excess of 500 further documents which had not previously been discovered; and
(c) they co-operated with the provision of additional discovery sought by
MRP.
[19] The defendant says that because of the late amendment to NZCF’s pleading, adding the most financially-significant part of the claim (the scale-up claim) to the matters in dispute, MRP was forced into providing discovery in a compressed timeframe. Given the huge quantity of documents which were arguably relevant on
a general discovery basis,4 MRP submits it would be unreasonable to hold that it had
failed to meet its discovery obligations. Furthermore, MRP argues that a substantial quantity of the documents sought by the plaintiffs in subsequent discovery related to
MRP’s contracts with other parties which contained scale-up provisions similar but
2 The judgment at [153].
3 At [154] and [155].
4 MRP says that it collected approximately 205,000 documents and searched and then reviewed
18,000 documents.
not identical to the clause in issue in this proceeding. They were disclosed, notwithstanding MRP’s view that the documents were not relevant to any issue to be determined.
[20] The plaintiffs included the other contractual scale-up material in their case at trial in an attempt, first, to show how clause 2.1(d) of the ERPA came to be included in the agreement. More significantly, NZCF sought to demonstrate that, after the execution of the ERPA on 12 January 2012, MRP adopted a position with regard to its contractual obligations and rights under similarly worded provisions in contracts with other parties which was inconsistent with the position it was taking in the proceeding.
Discussion on discovery point
[21] It was held in the judgment, however, that:5
… although clause 2.1(d) had its genesis in the negotiation of the Paraheka ERPA which was signed on 14 October 2011, the approach taken by MRP to the exercise of its contractual rights and its counterparties’ obligations under different contracts has little or no relevance to the interpretation and application of the agreement with NZCF.
[22] It was also held, for that reason that, while the arguments of counsel addressing the issue of post-contractual conduct had been considered, there was no relevant subsequent conduct which assisted in the resolution of the disputed contractual provisions.6
[23] Having heard no evidence, and not having seen the documents referred to by counsel in their costs submissions, I am not in a position to make any factual findings about the discovery issues raised. I note, however, that the reply of the defendant’s counsel, referring to the nature of the documents disclosed in subsequent discovery and their relevance, has not been disputed by the plaintiffs.
[24] In substantial commercial litigation of this kind, the Court is not well disposed to undertake a close analysis of the merits of positions taken by parties and
their legal advisers during the discovery phase of the proceeding, when the issues are not as finely nuanced as they are likely to become during the trial. Even experienced counsel are likely to disagree in the interlocutory stages about the relevance and relative importance of documents, and parties should not lightly be criticised for the positions they take. Assessing the potential relevance of documents at the interlocutory stages of a proceeding is more of an art form than a science. Except in a very clear case, I do not think it is appropriate for the Court, acting with hindsight, to penalise a party either for insisting on the disclosure of documents which proved to provide little or no assistance to the resolution of issues at trial, or for the withholding of documents, the relevance of which may not be obvious to the party at the time disclosure is sought.
[25] I am not persuaded in this case that there is a proper basis for a departure from the general principle that a successful party is entitled to costs for discovery in accordance with scale.
MRP’s settlement offer
[26] NZCF disputes the proposition that MRP should be entitled to increased costs because of the plaintiffs’ failure to accept the settlement proposals made in MRP’s solicitors’ letter of 7 October 2014. The plaintiffs say, first, that the offer was made at a time when NZCF was undertaking its review of the supplementary discovery provided by MRP on 2 October 2014, and when the plaintiffs were preparing their briefs of evidence in accordance with the Court’s timetable. The offer was open for only three days and expired on 10 October 2014, at which time NZCF considered full disclosure of relevant documents had not been made. The plaintiffs say this is evidenced by the provision of further documents by MRP on 24 and
31 October 2014.
[27] The plaintiffs argue that the threshold for increased costs (a determination that they had no reasonable justification for rejecting MRP’s offer) is a high one;7 that the reasonableness of the rejection should be assessed at the time of the offer,
not by reference to the outcome; and that a reasonable time to consider the consequences of rejecting the offer had not been provided.8
[28] Furthermore, NZCF argues that MRP’s offer did not accord with the eventual outcome in relation to the set-off issue in that the proposal acknowledged only that the amount withheld from the 2014 payment should be paid (conceding NZCF’s wash-up claim); it did not concede there was no general right to set off amounts under the contract, the position taken by NZCF (albeit incorrectly, as the judgment held).
[29] I accept that, in a complex commercial case involving several different issues, when the discovery process had not been completed, allowing the plaintiffs only three days to consider and accept the defendant’s settlement proposals was not reasonable. The time limit on the offer was no doubt determined in part by the defendant’s obligation to comply with the timetable for preparation for trial. But it would have been intended also to apply some commercial pressure to NZCF to end the litigation. In the circumstances, I do not think it would be reasonable to impose on NZCF the burden of the defendant’s full costs from the date the offer lapsed.
Increased costs to reflect the complexity and significance of the proceeding
[30] I acknowledge that the scale of costs is provided to support the principle in r 14.2(g) that “so far as possible the determination of costs should be predictable and expeditious”, but the Rules also provide that “an award of costs should reflect the complexity and significance of the proceeding”.9 I do consider that a costs contribution of $55,521, which is the sum to which the defendant would be entitled according to the Category 2B costs scale, is a provision which is adequate to meet the particular circumstances of this case.
[31] Considering the issue in the exercise of the Court’s general discretion under r 14.1, I take into account the following matters:
(a) NZCF succeeded in its wash-up claim, despite MRP’s defence that the additional sums claimed as a result of the mandatory emissions return were not payable. The sum at issue was around $420,000 and interest.
(b)While the extensive background evidence explaining the nature of the ETS and the commercial basis for the ERPA was generally relevant, it was significant principally in addressing the key question of whether the field management approach (“FMA”) to the determination of the units to be provided and paid for under the agreement was an accounting mechanism that was in operation at the time of the agreement. The plaintiffs failed on that issue.
(c) Although the commercial background to the agreement was relevant to the determination of the other issues, they were decided primarily on the construction of the agreement rather than on any finding of disputed fact.
(d)Given the detailed knowledge of MRP’s carbon emissions policy held by NZCF’s principal negotiator, Mr Miller; the close association between Mr Miller and MRP’s representative, Mr Smith; and their frank exchange of information about carbon production estimates based on FMA assessments, the scale-up claim must be regarded as having been speculative from the outset. It was conceded by NZCF in evidence at trial, and held in the judgment, that modelling work done for NZCF by Dr McClintock after the ERPA came into force was based on the attempts to estimate what a participant-specific FMA would show as having been produced by the forest. There was a telling exchange of emails in August 2011 in which a consensus was reached between the contracting parties as to the forest’s capacity to
deliver carbon credits using the field measurement approach.10
(e) It was obvious, also, that the plaintiffs’ argument that the FMA was not “in operation” on 12 January 2012 was illogical for the reasons pointed out in the judgment at [116].
[32] I have held that leaving the settlement offer of 7 October 2014 open for only three days was unreasonable. Nevertheless, it was open to the plaintiffs to return to the question of possible settlement after discovery had been completed and the briefs of evidence exchanged, well before trial, and undertake a realistic assessment of their prospects. I have observed above that, in general terms, MRP’s offer predicted the outcome of the trial.
[33] The scale-up claim involved an assertion by NZCF that the plaintiffs were entitled to provide, and the defendant required to purchase, nearly twice as many NZUs as the maximum expressed in the agreement. The additional financial burden for MRP would have been many millions of dollars over the 15-year contract term. NZCF’s scale-up claim was unquestionably one which called for a thoroughly prepared and presented rebuttal by experienced and senior counsel.
[34] Standing back and looking at the complexity and significance of the proceeding overall, including the significance of the scale-up argument; taking into account that the argument failed; and being of the opinion that it had, at best, only limited prospects of success, I consider the defendant to be entitled to an uplift in costs but not of the amount sought.
[35] Against the background of MRP’s actual costs in the proceeding of $395,000, I consider an uplift of $100,000 above the scale costs would be reasonable. The total sum of $155,512 represents a 40 per cent recovery.
Order
[36] In the result, the plaintiffs shall pay to the defendant: (a) costs in the sum of $155,521; and
(b) disbursements in the sum of $35,308.96.
…….………………..
Toogood J
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