Nzchi International Exporting Limited v Zhang

[2015] NZHC 2160

IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY

CIV-2014-454-34 [2015] NZHC 2160

BETWEEN

NZCHI INTERNATIONAL EXPORTING

LIMITED First Plaintiff

YAOMING GONG Second Plaintiff

AND

SHIJUN ZHANG First Defendant

XIAOYUAN ZHAO Second Defendant

JIANHUA HOU Third Defendant

On papers
Judgment:	8 September 2015

JUDGMENT OF ASSOCIATE JUDGE MATTHEWS (Costs)

[1]      The first and second plaintiffs have discontinued this proceeding against the first and third defendants.  The first and third defendants apply for costs.  They say that costs should be awarded on a 2B basis, with an uplift of 50 per cent.

[2]      The first and second defendants are two of the four directors of the first plaintiff.  The second plaintiff is also a director.  The second and third defendants are shareholders in the first plaintiff, holding the majority of the shares.   The second plaintiff is also a shareholder.

[3]      The proceeding was issued on 18 March 2014.  On 2 May 2014, the solicitors for the first and third defendants wrote to the solicitors for the plaintiffs questioning

NZCHI INTERNATIONAL EXPORTING LTD v ZHANG [2015] NZHC 2160 [8 September 2015]

whether the plaintiffs had authority from the first plaintiff to issue the proceeding.  It transpires that the second plaintiff considers that, as managing director, he has that authority.  The first and third defendants say that the company has never authorised the issue of this proceeding, and that if the second plaintiff wished the first plaintiff to do so, it was open to him to apply to the Court for leave to bring a representative action.  The first and third defendants therefore say that increased costs should be awarded  under  r 14.6(b)(ii)  of  the  High  Court  Rules  for  taking  or  pursuing  an unnecessary step or an argument that lacks merit, and/or under r 14.6(b)(iii) for failing, without reasonable justification, to accept a legal argument.

[4]      In  addition,  the  first  and  third  defendants  criticise  the  drafting  of  the statement of claim, a point also taken by Associate Judge Smith who, in a minute dated 25 July 2014, expressed a preliminary view that the statement of claim did not comply with the High Court Rules.   His Honour described it as discursive, conversational, replete with evidence rather than proper pleadings, and unlikely to survive any strike out application as a result.

[5]      The first and third defendants seek costs against both the first plaintiff and the second plaintiff on the basis that the second plaintiff was instrumental in the first plaintiff issuing the proceeding without authority of its directors.

[6]      The plaintiffs oppose an uplift in costs, although they do not oppose an award of costs against both the first and the second plaintiffs, on a 2B basis.  Unusually, Dr Gong suggests that costs should be on a 2C basis; as this suggestion is contained in a sentence from counsel, Mr Maassen, pronouncing that this is not a complex proceeding, I suspect that the suggestion that scale 2C might be appropriate is an error.    In any event,  I am quite satisfied that  the case is properly classified in category 2, and that the starting point for costs should be in band B.

[7]      The only point for determination is whether there should be an uplift in costs on the basis suggested by the defendants.   Dr Gong protests that the question of whether or not he was authorised to instruct solicitors to bring proceedings in the name of the company remains in issue.  He also says that, in a letter dated 15 January

2015, the solicitors for the first and third defendants sought costs on a 2B basis against both plaintiffs, and cannot now seek a higher award.

[8]      I reject the latter proposition.  There is no evidence that the offer to accept costs on that basis was accepted.  The matter has had to be referred to the Court, and the first and third defendants are entitled to apply for costs in the terms they consider appropriate.

[9]      In Yu v Whitford Properties Ltd the Court said:1

[15]      Mr Allan frankly acknowledged that he was unable to point to any provision in a shareholders’ agreement or the constitution of the defendant, or to any statutory provision or principle of law, entitling a sole director to bind the company in the absence of a resolution of the board giving him delegated  authority to  do so.    I concluded,  therefore, that  the  notice  of opposition dated 25 October 2013 and the amended notice of opposition dated 15 November 2013, having been filed without the proper authority of the defendant company, must be struck out.

[10]     As  in  that  case,  the  second  plaintiff  has  not  produced  any  evidence  of authority, and it seems likely that had the proceeding not been discontinued, it would have been struck out on the basis that the issuing of the proceeding had not been properly  authorised  by  the  first  plaintiff.    As  well,  the  proceeding  faced  the difficulties recognised by Associate Judge Smith.  Notwithstanding this, the plaintiffs do not appear to accept that the proceeding was discontinued because of lack of authority to issue it, and instead refer, in their memorandum in reply, to there being three proceedings underway at the same time, and it being the second plaintiff’s preference to concentrate on the other two proceedings rather than this one.   The plaintiffs do accept that the pleadings required substantial redrafting.

[11]     I have considered all the material placed before me on this application.  It is plain that the first and third defendants gave written notice to the plaintiffs on 2 May

2014 that the first plaintiff did not, in their view, have proper authority to issue the proceeding, and that on that basis they would apply to strike out the statement of claim if a notice of discontinuance was not filed by Wednesday, 7 May 2014.  In the

same letter, the solicitors for the first and third defendants reserved the right to place

1      Yu v Whitford Properties Ltd [2013] NZHC 3162.

the letter before  the Court  in  support  of an  application  for increased  costs.   A discontinuance was not filed.   In my view the letter was justified, and failure to respond appropriately to it, by discontinuing the proceeding, put the first and second defendants in a position where it was necessary for them to file a statement of defence.  This is clear evidence of a failure without reasonable justification to accept a legal argument in terms of r 14.6(3)(b)(iii).   I find therefore that an award of increased costs is appropriate.

[12]     As noted, the first and third defendants seek an uplift of 50 per cent.  Given that scale costs are intended to approximate two thirds of actual and reasonable costs, an uplift of this magnitude would place the costs into the realm of indemnity costs.  I am not satisfied this is appropriate in this case.  It is plain from the material put before me that there are issues of some complexity between the parties to this case, and I am not satisfied that an award of costs in the broad range of actual costs which might be incurred is appropriate.

[13]     I award costs on a 2B basis, plus an uplift of 25 per cent, together with such disbursements as are certified by the Registrar.

J G Matthews

Associate Judge

Solicitors:

Cooper Rapley, Palmerston North for plaintiffs

Harkness Henry, Hamilton for first and third defendants