New Zealand Carbon Farming Ltd v Mighty River Power Ltd
[2016] NZCA 624
•19 December 2016 at 3.30 pm
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA726/2015 [2016] NZCA 624 |
| BETWEEN | NEW ZEALAND CARBON FARMING LIMITED NZCF LAIDMORE LIMITED |
| AND | MIGHTY RIVER POWER LIMITED |
| Court: | Wild, French and Cooper JJ |
Counsel: | C P Browne and E F Armstrong for Appellants |
Judgment: (On the papers) | 19 December 2016 at 3.30 pm |
JUDGMENT OF THE COURT
AThe appeal is allowed.
BThe judgment in the High Court is set aside.
CThe appellants are jointly and severally liable to pay costs in the High Court to the respondent in the sum of $70,000 and disbursements in the sum of $35,308.96.
DThe respondent must pay the appellants one set of costs for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Cooper J)
This is an appeal against an award of costs in the High Court.[1] It has been dealt with on the papers by consent of the parties.
[1]New Zealand Carbon Farming Ltd v Mighty River Power Ltd [2015] NZHC 2894 [New Zealand Carbon Farming costs].
This Court has previously considered and disposed of an appeal from the substantive High Court judgment in the proceeding.[2] The full details of the dispute between the parties are set out in that judgment and we do not repeat them here. The High Court dealt with the issue of costs in a separate judgment.
Background
[2]New Zealand Carbon Farming Ltd v Mighty River Power Ltd [2015] NZCA 605 [New Zealand Carbon Farming CA], on appeal from New Zealand Carbon Farming Ltd v Mighty River Power Ltd [2015] NZHC 1274 [New Zealand Carbon Farming HC].
The litigation between the parties concerned the meaning and application of provisions of an agreement between the parties executed in January 2012. The agreement related to the sale by the appellants (to whom we refer together as NZCF) to the respondent (MRP) of carbon units transferred to NZCF under the New Zealand Emissions Trading Scheme established under the Climate Change Response Act 2002 (the Act). Both NZCF and MRP (by way of counter-claim) sought declarations in the High Court about the meaning and application of various provisions of the agreement.
The principal issue, both in the High Court and on appeal, concerned the number of units that MRP would be obliged to purchase and NZCF would be obliged to sell. That issue arose because, under cl 2.1(d) of the agreement, it was contemplated that the number of units to be purchased and transferred would be different from the number stated in the agreement in the event of a change in units allocated to NZCF resulting from any change after execution of the agreement in the accounting mechanism provided for under the Act. That issue turned on the proper construction of the phrase “[change in] approach in operation under the Act at the signing of this Agreement”. The High Court and the parties referred to this issue as “the scale-up issue”. On that issue, MRP was successful in the High Court and on appeal.
Other issues argued in the High Court included:
(a)an issue concerning the date on which payments fell due under the agreement (the payment date issue);
(b)a dispute concerning MRP’s entitlement to set off or withhold an alleged overpayment by MRP in 2013 against the sum payable to NZCF for the delivery of units in 2014 (the set-off issue);
(c)an issue concerning the disclosure of documents needed to enable MRP to verify NZCF’s claims for payment for units delivered under the agreement (the document obligation issue);
(d)whether MRP would be required to purchase units attributable to the relevant forest’s carbon performance in the prior year or whether it would be obliged to take additional units received from the mandatory reassessment of carbon performance at the end of the five-year commitment period (the wash-up issue); and
(e)whether MRP was entitled to rectification of the agreement if it did not succeed on the scale-up issue (the rectification issue).
In the result, the High Court did not deal with the rectification issue because it decided the scale-up issue in MRP’s favour. The wash-up and document obligation issues were decided in favour of NZCF. A cross-appeal by MRP on those two issues was rejected by this Court. The payment date issue was resolved in the High Court but not pursued on appeal. The set-off issue, decided in favour of MRP in the High Court, was also not pursued on appeal.
The High Court judgment
In the High Court MRP sought an order for the payment of $205,521 in costs, together with disbursements in the sum of $35,308.96. MRP’s position was based on propositions that:
(a)the category 2B scale should be applied;
(b)MRP succeeded on the most significant issue in the proceeding (the scale-up issue);
(c)the case was of such complexity to justify certification for payment of fees in respect of second counsel;
(d)NZCF refused a Calderbank offer by MRP to settle the proceeding and continued to pursue the scale-up claim notwithstanding MRP’s view articulated in its Calderbank letter that the claim could not succeed; and
(e)an uplift of $150,000 should be added to the scale costs.
Toogood J noted that NZCF accepted that costs should be calculated on a category 2B basis and that the claim for costs for second counsel was appropriate. However, NZCF claimed costs should be left to lie where they fall because both sides succeeded on aspects of the claim and MRP allegedly defaulted on its discovery obligations. Alternatively, certain costs claims should be allowed to NZCF and deducted from any award to MRP. In this category it was alleged that MRP had wrongly refused to participate in the contractual dispute resolution procedure and that it was therefore not entitled to costs on the initial stages of the proceeding up to the first case management conference. The Judge rejected that proposition and also rejected claims for deductions based on alleged shortcomings of MRP in respect of its discovery obligations. These claimed deductions are not the subject of argument on appeal.
NZCF also disputed the proposition that MRP should be entitled to costs reflecting NZCF’s failure to settle in response to the letter from MRP’s solicitors dated 7 October 2014. The Judge rejected MRP’s argument on this issue. 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 was open for only three days, expiring on 10 October 2014, at which point NZCF considered further disclosure needed to be made. The Judge expressed the view that, in a complex commercial case involving several different issues and when the discovery process had not been completed, the three-day period allowed to consider and accept the settlement proposal was not reasonable.
Costs calculated in accordance with category 2B amounted to $55,521. The Judge considered that would be an inadequate figure in the particular circumstances of this case. He referred to r 14.2(b) of the High Court Rules (the Rules), which provides, as one of the general principles applicable to the determination of costs, that “an award of costs should reflect the complexity and significance of the proceeding”. He then proceeded to apply the Court’s general discretion under r 14.1 to increase the sum awarded. The considerations that led him to do so were:
(a)Extensive background evidence had been led explaining the nature of the emissions trading scheme and the basis upon which the entitlement to units was to be assessed. This was principally for the purpose of addressing the key question of whether the units to be provided and paid for under the agreement had been assessed in accordance with an accounting mechanism in operation under the legislation at the time of the agreement. NZCF had failed on this issue.
(b)Although the commercial background of the agreement was relevant to the determination of the other issues raised, they were decided primarily on the construction of the agreement rather than on any finding of disputed fact.
(c)The scale-up claim was, in the Judge’s view, “speculative from the outset” having regard to the knowledge of the key witnesses about the basis on which carbon production estimates had been modelled and calculated.[3] NZCF’s argument that the relevant statutory provisions were not “in operation” at the relevant time was illogical. Although it was not fully operational, there was at the relevant time no other accounting mechanism that could apply to the forest the subject of the agreement.[4]
[3]New Zealand Carbon Farming costs, above n 1, at [31(d)].
[4]At [31(e)], referring to New Zealand Carbon Farming HC, above n 2, at [116]. It is accepted that was incorrect as a matter of law and that default look-up tables were in effect.
The Judge also noted that, although the settlement offer had unreasonably been left open for only three days, NZCF could have explored the question of a possible settlement after the completion of discovery and the briefs of evidence had been exchanged, which was well before the trial. At that stage NZCF could have made a realistic assessment of its prospects. The Judge recorded his view that MRP’s offer had in general terms predicted the outcome of the trial.
Another consideration he mentioned was the financial implications of NZCF’s claim, which would have obliged MRP to purchase nearly twice as many units as the maximum expressed in the agreement. In the circumstances, NZCF’s claim was unquestionably one that warranted representation by experienced senior counsel.
He concluded:
[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 [MRP] 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.
The appeal
NZCF’s submissions
Mr Browne for NZCF advanced the appeal on four grounds.
First, it was said the Judge departed from established principles and his approach is contrary to that required by this Court’s judgment in Holdfast NZ Ltd v Selleys Pty Ltd.[5] The parties had agreed in their memoranda on costs that the appropriate category for calculating scale costs was 2B and the Judge had not adopted a different costs category. Rather, he effectively awarded increased costs, not by reference to the grounds for doing so set out in r 14.6, but by resorting to the general discretion conferred by r 14.1, under which all costs matters are “at the discretion of the Court”. The Judge had therefore purported to award increased costs to reflect the complexity and significance of the proceeding, despite the fact that complexity and significance is a matter already addressed when the scale category for costs is fixed under r 14.3.
[5]Holdfast NZ Ltd v Selleys Pty Ltd (2005) 17 PRNZ 897 (CA).
The total costs award amounted to an uplift of more than 180 per cent from scale costs. That was well in excess of the 50 per cent uplift commonly allowed when increased costs are awarded under r 14.6.[6]
[6]Citing Holdfast, above n 5, at [46]–[48].
The second ground alleged the Judge was plainly wrong. The factors addressed in the exercise of his general discretion did not justify an uplift from scale costs. Further, they were not grounds that might justify an award of increased costs under r 14.6(3). Insofar as MRP relied on the failure to accept the settlement offer in seeking increased costs, as is permitted by r 14.6(3), Mr Browne emphasised that the Judge had rejected reliance on MRP’s letter of 7 October 2014 on the basis that the timeframe for acceptance was unreasonable.
Mr Browne submitted the proceeding did not come within any of the available grounds for ordering increased costs in r 14.6(3). Although NZCF ultimately did not succeed on the scale-up issue, its claim was reasonably arguable and grounded in the application of accepted contractual interpretation principles.
As a third ground NZCF submitted that Toogood J took into account two irrelevant considerations. First, he formed his judgment by considering MRP’s actual costs. Second, he took into account his conclusion that NZCF’s argument had only limited prospects of success. Mr Browne claimed that the Judge’s conclusion in that respect had been based upon an erroneous determination that the “default look-up tables”, by which units were to be calculated before the relevant statutory regime became fully operative, had ceased to apply.
Finally, Mr Browne claimed that NZCF had been successful in relation to three of the five issues determined by the High Court and that should have been taken into account in the costs award by reducing the sum to which MRP would otherwise be entitled. Mr Browne submitted the Judge should have taken a similar approach to that taken by this Court when it rejected both NZCF’s appeal and MRP’s cross-appeal and reduced by 10 per cent the costs to which MRP was otherwise entitled after succeeding on the main issue argued on appeal.[7]
MRP’s submissions
[7]New Zealand Carbon Farming CA, above n 2, at [201]–[202].
Mr Hodder QC submitted that Toogood J had appropriately exercised his discretion to depart from scale costs. He said the Rules maintain an important “overarching discretion”, enabling a departure from scale costs in cases where that is appropriate to deter unreasonable or unnecessary behaviour by a litigant. He accepted that, where there is a departure from scale costs, the departure must be “principled and particularised”, referring to this Court’s judgment in Glaister v Amalgamated Dairies Ltd.[8] However, he argued that, in accordance with Glaister:
(a)the departure from scale costs must be applied in a way that meets the objectives of the costs regime;[9]
(b)the departure from scale costs must be to accommodate circumstances that are either not contemplated by the regime, or unfairly recognised by the regime;[10]
(c)the departure from scale costs must be for the purpose of maintaining the integrity of the regulatory character of the regime;[11] and
(d)the Rules must be applied in a complementary way to produce an effective result, although that does not mean the Court may merely put up a global sum against actual costs.[12]
[8]Glaister v Amalgamated Dairies Ltd [2004] 2 NZLR 606 (CA) at [22].
[9]Citing Glaister v Amalgamated Dairies Ltd, above n 8, at [16].
[10]Citing Glaister v Amalgamated Dairies Ltd, above n 8, at [22].
[11]Citing Glaister v Amalgamated Dairies Ltd, above n 8, at [21].
[12]Citing Glaister v Amalgamated Dairies Ltd, above n 8, at [24] and [28].
Mr Hodder further submitted that, in any event, an award of increased costs was appropriate here because NZCF contributed unnecessarily to the time and expense of the proceeding by:
(a)rejecting MRP’s Calderbank offer, which is claimed to have been more beneficial than the ultimate judgment; and
(b)pursuing its “inconceivable” scale-up claim, which radically changed the litigation by increasing the disputed amount from $420,000 (the value of NZCF’s wash-up claim) to the sum of $34.67 million (the value of the scale-up claim).
As to the Calderbank offer, Mr Hodder submitted that discovery had in fact largely been completed when the offer was made and certainly the key documents evidencing the parties’ negotiations leading to the contract and their behaviour during the first delivery of units under the agreement had been disclosed.
Insofar as pursuit of the scale-up claim was concerned, Mr Hodder submitted that increased costs should be awarded to MRP because NZCF’s pursuit of the claim was unreasonable and its position lacked any serious merit. As a consequence, NZCF had “contributed unnecessarily to the time and expense of the proceeding” in a manner relevant under r 14.6(3)(b)(ii). The argument had been definitively rejected in both the High Court and this Court, with the latter describing the claim as “inconceivable”. MRP had consistently maintained the scale‑up claim was “untenable”. That was the most significant issue in the proceeding and MRP should not have to bear the substantial costs of NZCF pursuing the issue.
Mr Hodder further submitted that the costs awarded by Toogood J appropriately reflected the objectives of the Rules. He noted that scale costs are designed to reflect two thirds of the costs deemed to be reasonable in a proceeding. An increase of 50 per cent from scale costs would only grant MRP the full daily recovery rate deemed reasonable for the proceeding. He argued that this Court’s decision in Holdfast NZ Ltd should not be regarded as having set a cap of 50 per cent for increases from scale costs and noted that, in any event, the relevant discussion in that judgment was not concerned with Calderbank offers.[13]
[13]Citing Holdfast NZ Ltd v Selleys Pty Ltd, above n 5, at [47].
Mr Hodder accepted that the High Court Judge had made a factual error in holding that the default look-up tables were not in operation at the relevant time, but the error was neither a necessary nor a principal factor in the reasoning of the Court. He claimed that NZCF could point to no other relevant error. Further, he submitted the Judge had not used MRP’s actual costs as a basis for determining the costs award. Instead, actual costs were used as a reference point and to ensure the costs award was not greater than the actual costs.
Our analysis
Rule 14.1(1) of the Rules provides that all matters are “at the discretion of the Court” if they relate to costs. However, a number of decisions of this Court have made it clear the High Court should apply the specific rules set out in rr 14.2–14.11 unless there is some appropriate reason for departing from them.
The appropriate approach was discussed in Glaister.[14] In that case, this Court referred to its previous decisions in Body Corporate 97010 v Auckland City Council[15] and Mansfield Drycleaners Ltd v Quinny’s Drycleaning (Dentice Drycleaning Upper Hutt Ltd).[16] It was said the former held that, although r 46 (now r 14.1) provided the High Court with an overriding discretion, the discretion was generally to be exercised in accordance with the specific rules that followed. However, although the general discretion was qualified by the specific rules, the Rules do not cover every eventuality and occasionally it will be necessary to have resort to the general discretion.[17] From the latter, the Court quoted the observation that, “While r 46 preserves the Court’s overriding discretion, there is a strong implication that a court is to apply the regime in the absence of some reason to the contrary”.[18]
[14]Glaister v Amalgamated Dairies Ltd, above n 8.
[15]Body Corporate 97010 v Auckland City Council (2001) 15 PRNZ 372 (CA).
[16]Mansfield Drycleaners Ltd v Quinny’s Drycleaning (Dentice Drycleaning Upper Hutt) Ltd (2002) 16 PRNZ 662 (CA).
[17]Glaister v Amalgamated Dairies Ltd, above n 8, at [19], referring to Body Corporate 97010, above n 15, at [19]–[21].
[18]Glaister v Amalgamated Dairies Ltd, above n 8, at [19], quoting from Mansfield Drycleaners Ltd, above n 16, at [27].
The Court in Glaister itself said:
[22] When a departure is to be made from the High Court Rules’ allowances, it is necessary that it be done in a particularised, and principled way. As was observed by this Court during the course of argument, the problem is a familiar one in our jurisprudence — a scheme of general application is laid down, but provision then has to be made for something that is not contemplated within the scheme or which is unfairly recognised by it.
The judgment proceeded to note the allowances in the Rules might be inappropriate in a given case. It was said in commercial litigation there could be difficulties arising, typically in two areas: where there is an unusual volume of documents for discovery or where for some reason the “quite generous allowance” of two days for preparation for trial for every day of the trial proves inadequate.[19] The Court continued:
[24] To put this another way, there is a relatively obvious logic to the monetary allowances in the new rules and the discretion exists to enable the unexpected and the unforeseen to be fairly accommodated. It is not a case of R 46 having an exclusionary primacy over R 47 (or any other rules): the rules are complementary, and designed to produce an effective whole.
Both Glaister and Mansfield Drycleaners have since been endorsed by the Supreme Court.[20]
[19]At [23].
[20]Manukau Golf Club Inc v Shoye Venture Ltd [2012] NZSC 109, [2013] 1 NZLR 305 at [7].
Reference can also usefully be made to this Court’s decision in Gibson v Minter Ellison Rudd Watts.[21] In that case, it was said:
[100] While it is true that r 46 confers a general costs discretion, that does not mean costs orders are or should be immune from appellate review. The reason for that discretion was given by this court in Glaister v Amalgamated Dairies Limited at [24]: “The discretion exists to enable the unexpected and the unforeseen to be fairly accommodated.” The court also observed that the costs regime introduced with effect from 1 January 2000 “is of a regulatory character”: at [21]. The court emphasised the importance of maintaining the integrity of the scheme; where a departure from the scheme was warranted, it was necessary, this court said, “that it be done in a particularised, and principled way”: at [22]. An appellate court will interfere only if “the Judge has applied wrong principles of law, or was plainly wrong”: at [30].
(Citation omitted.)
[21]Gibson v Minter Ellison Rudd Watts, a firm [2007] NZCA 595.
We have summarised above the reasons Toogood J gave for departing from the costs that would be payable calculated on a category 2B basis in this case. We underline that he did not articulate his decision on the basis that he was purporting to apply r 14.6, which specifically contemplates an award of increased costs. Rather, he referred to the general discretion conferred by r 14.1(1) and purported to exercise that.
The reasons that he gave for his approach were, in substance, that a great deal of the cost of the litigation was attributable to NZCF’s failed argument on the scale‑up issue and the suggestion that NZCF must have known that it was running a speculative argument on that issue, which was unlikely to succeed. While he did not specifically weight the costs order on the basis that NZCF had failed to respond to the Calderbank offer, he nevertheless emphasised the possibility that NZCF would have settled had it taken a more realistic view as to its prospects at the trial. In that respect, he held that in general terms MRP’s offer had predicted the outcome of the trial.
Having canvassed those issues, the Judge then took the approach of standing back and looking at the complexity and significance of the proceeding overall. In part, that approach no doubt reflected the principle set out in r 14.2(b) that an award of costs should reflect the complexity and significance of the proceeding. But it failed to recognise that principle is in fact one of the foundations of the detailed costs regime set out in the following rules. In other words, the statutory regime accounts for it. Apart from that consideration, the Judge in standing back effectively repeated his earlier observations about the significance of the scale-up argument, the fact that it failed and the fact that at best it had only ever had limited prospects of success.
We think it is clear in the circumstances that the Judge did not have resort to the general discretion under r 14.1 to deal with something that could be described as “unexpected” or “unforeseen”. Far from being a matter not provided for in the Rules, running an argument that lacks merit is a consideration specifically addressed at r 14.6(3)(b)(ii) of the Rules. Relevantly, that rule provides that the court may order a party to pay increased costs if the party opposing costs has contributed unnecessarily to the time or expense of the proceeding by pursuing an argument that lacks merit. To the extent that the Judge’s reasoning was also based on NZCF’s failure to accept an offer of settlement, that is an issue also specifically addressed at r 14.6(3)(b)(v).
The reasoning did not depend at all on factors such as those mentioned in Glaister that might suggest the time allowances provided for in sch 3 of the Rules were inadequate.[22] Nor does consideration appear to have been given to whether the proceeding was correctly placed in category 2B. While the latter may be the result of the way the parties dealt with the costs issues, ensuring the correct categorisation of the proceeding could have been the appropriate way to respond to the principle stated in r 14.2(b) of the Rules.
[22]Glaister v Amalgamated Dairies Ltd, above n 8, at [23].
We therefore conclude there was no justification here to invoke the broad discretion stated in r 14.1(1).
That conclusion does not mean, however, that an award of increased costs cannot be made. As we have said, such an award would apparently be within the contemplation of r 14.6(3)(b)(ii) and Mr Hodder has relied effectively on that rule. Essentially, he submits that pursuit of the scale-up claim was unreasonable, and referred to this Court’s use of the word “inconceivable”.[23] We used that word after reviewing evidence about post-contract conduct, which showed that it was not until 15 July 2013 that NZCF’s argument about the meaning of cl 2.1(d) first came to light, well after the first units had been delivered under the agreement and paid for. That was the context in which we said it was inconceivable NZCF could have intended the clause would be triggered so as to effectively double the volume of units the subject of the agreement.
[23]New Zealand Carbon Farming CA, above n 2, at [166].
We accept Mr Hodder’s submission that the appeal lacked merit. However, we would not characterise its pursuit as unreasonable and the argument presented was not hopeless. NZCF was able to point to the fact there was a different statutory regime in force for the calculation of the numbers of units at the time the agreement was signed and also to the fact that the statutory regime envisaged there would only be one method of calculation in force at any particular time. There were at least available starting points for its argument about the meaning of the agreement.
Further, we remind ourselves that not every losing argument justifies an award of increased costs. As this Court observed in Bradbury v Westpac Banking Corp, costs awards should allow litigants with real arguments presented responsibly to approach the Court without apprehension that the “predictable costs regime” will not be applied if their case fails.[24] The “predictable costs regime” is that which results from application of the detailed Rules, as opposed to the broad discretion in r 14.1(1).
[24]Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] 3 NZLR 400 at [94].
We also take into account the fact that the Judge did not allow any deduction from the scale costs to reflect the fact that NZCF succeeded on some issues in the High Court. It may be the Judge’s approach was influenced by the fact that the principal dispute, both of fact and law, was the scale-up issue. In the absence of any explanation for the Judge’s approach we have considered whether we should send the matter back, but in the end we think that the sums involved would not justify that approach.
Balancing these considerations, we consider the best approach will be to make a moderate award of increased costs that also takes into account the issues on which NZCF in fact succeeded in the High Court. In our judgment, the appropriate resolution of the matter will be to award increased costs calculated on the basis of an approximate 25 per cent increase in the costs otherwise payable under category 2B, or $70,000. This sum is $5,000 less than it would have been if NZCF had not succeeded on some issues in the High Court.
Result
For the reasons we have given, the appeal is allowed. The judgment in the High Court is set aside. We order that NZCF pay costs in the High Court to MRP in the sum of $70,000 and disbursements in the sum of $35,308.96.
As the successful party on appeal, NZCF is entitled to its costs. MRP must pay NZCF one set of costs for a standard appeal on a band A basis and usual disbursements. The quantum of costs this represents will take into account that the appeal has been dealt with on the papers.
Solicitors:
Wilson Harle, Auckland for Appellants
Chapman Tripp, Auckland for Respondent
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