Soshi Gakuen New Zealand Incorporated v Vo

[2020] NZHC 2218

IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY

I TE KŌTI MATUA O AOTEAROA TE PAPAIOEA ROHE

CIV-2019-454-72

[2020] NZHC 2218

BETWEEN

SOSHI GAKUEN NEW ZEALAND INCORPORATED
Applicant

AND

KHIET THANH VO

First Respondent

AND

NHU THAO PHAM

Second Respondent

AND

LAND INFORMATION NEW ZEALAND

Third Respondent

Hearing:

On the papers

Counsel:

A O’Connor for Applicant

D Drummond for the First and Second Respondents

Judgment:

28 August 2020

JUDGMENT OF GRICE J

(Costs and order to remove caveat)

Overview

[1]    This is an application for costs by the first and second respondents, Mr Vo and Ms Pham. It follows the dismissal on 11 March 2020 of the substantive application by Soshi Gakuen New Zealand Inc (Soshi Gakuen) for an order to sustain a caveat it lodged over the title to a property in Palmerston North (the property) which is owned and occupied by the first and second respondents.1 The third respondent is Land Information New Zealand who has not entered a defence or taken any other step in the

1      Soshi Gakuen New Zealand Inc v Vo [2020] NZHC 470 [Substantive judgment].

SOSHI GAKUEN NEW ZEALAND INCORPORATED v VO [2020] NZHC 2218 [28 August 2020]

proceeding. (I shall refer to the first and second respondents as “the respondents” from here).2

Substantive application

[2]    Soshi Gakuen is the parent company of two (and possibly more) private educational organisations. One of these organisations, International Education Foundation (NZ) Inc (IEF) employed Mr Vo. Part of Mr Vo’s employment included travel abroad to market IEF. Each trip required travel arrangements, known as “ringis”, organised and funded by the applicant. Over 20 trips were organised.

[3]    In the application to sustain the caveat, the applicant alleged that Mr Vo had breached his contractual obligations to account for eight ringis (trips), undertaken between 2016 and 2017. Soshi Gakuen invited the Court to infer that part of these funds had been used by the respondents to purchase the property and therefore the respondents were constructive trustees for the applicant of some portion of their equity in the property.

[4]    Mr Vo responded that, the ringi costs were more or less on budget and he reported the outcome of the trips. He said he was only obliged to account for any material underspend against the budget and was entitled to claim any material overspend. Mr Vo said that this was why there were only eight ringis or arrangements for which he did not account against budget for financial expenditure.

[5]    The Judge focussed on the key issue of “whether the evidence that the applicant has put before the Court is sufficient to establish a reasonably arguable case that [the applicant’s] resources were employed by Mr Vo and Ms Pham in the acquisition of the property”.3

[6]    The Judge dismissed the applicant’s claim. He considered the applicant’s arguments as follows:

2      The first costs judgment in this matter was recalled on 10 August 2020 as it was delivered before the applicant’s memorandum, and the respondents’ reply memorandum on costs, had been brought to the Judge’s attention. Soshi Gakuen New Zealand Inc v Vo [2020] NZHC 1990 (recalled) [First Costs Judgment].

3      Substantive judgment, above n 1, at [18].

(a)The first limb of Soshi Gakuen’s claim concerned trips taken between July 2010 and March 2018. The Judge found that, from  the outset,  Mr Vo accounted for expenditure in the manner described in the agreed policy. The applicant did not produce any contemporaneous evidence that the applicant had raised any issue with Mr Vo over the eight-year period in question. The Judge held that the applicant did not make out a reasonably arguable case that Mr Vo breached the terms of the contract of employment or failed to account in any manner.

(b)For trips taken between 2016 and 2017 involving trips to Vietnam to establish IEF’s office in that country, the Judge found that Mr Vo had requested payment be transferred into his father’s bank account in Vietnam. The Judge found that this was a matter of convenience and did not evidence fraud.4

(c)The Associate Judge accepted the respondents’ explanation for the purchase of the property. He found no evidence contradicting Mr Vo’s explanation. The evidence of the respondents established the source of the funds used to buy the property. The Judge concluded:5

[39]Against that background, the applicant effectively asks the Court to infer that Mr Vo fraudulently failed to account for monies advanced to him by his employer, accumulated these funds with family abroad, arranged for them to be transmitted back when he needed them and used them to assist in the purchase of the home purchased by him and Ms Pham. That is a very serious allegation. In his affidavit evidence the applicant’s principal witness, Mr Tsumakura, refers to it as a “theory”. As Mr Drummond submitted, that description is entirely apt. Moreover, it is a theory that as far as I can see is unsupported by any probative evidence.

[40]As stated earlier, the applicant bears the burden of establishing that it has a reasonably arguable case. The law recognises that the standard of proof in civil cases — the balance of probabilities — is a malleable one, the balancing exercise shifting depending on the nature of the allegation made. An allegation of fraud is perhaps the most serious allegation that can be made in civil proceedings. It therefore needs to be supported by some evidence.

4 At [33].

5      At [39]–[41] (footnotes omitted).

[7]The Judge concluded:

[41]I am far from satisfied that the applicant can establish — even to the point of having a seriously arguable case —fraud.

[8]    On 11 March 2020 the Judge dismissed the application to sustain the caveat and reserved costs.

Costs

[9]    The starting point for considering costs is pt 14 of the High Court Rules 2016 (Rules). Costs are at the discretion of the Court following consideration of the outlined principles in r 14.2. They are:

(a)the party who fails with respect to a proceeding or an interlocutory application should pay costs to the party who succeeds:

(b)an award of costs should reflect the complexity and significance of the proceeding:

(c)costs should be assessed by applying the appropriate daily recovery rate to the time considered reasonable for each step reasonably required in relation to the proceeding or interlocutory application:

(d)an appropriate daily recovery rate should normally be two-thirds of the daily rate considered reasonable in relation to the proceeding or interlocutory application:

(e)what is an appropriate daily recovery rate and what is a reasonable time should not depend on the skill or experience of the solicitor or counsel involved or on the time actually spent by the solicitor or counsel involved or on the costs actually incurred by the party claiming costs:

(f)an award of costs should not exceed the costs incurred by the party claiming costs:

(g)so far as possible the determination of costs should be predictable and expeditious.

[10]   These principles may be departed from in cases where it is justified for the Court to award increased costs or indemnity costs. Rule 14.6 of the Rules insofar as relevant provides:

14.6 Increased costs and indemnity costs

(1)Despite rules 14.2 to 14.5, the court may make an order—

(a)increasing costs otherwise payable under those rules (increased costs); or

(b)that the costs payable are the actual costs, disbursements, and witness expenses reasonably incurred by a party (indemnity costs).

…

(3)The court may order a party to pay increased costs if—

…

(b)the party opposing costs has contributed unnecessarily to the time or expense of the proceeding or step in it by—

…

(ii) taking or pursuing an unnecessary step or an argument that lacks merit; or

…

(d) some other reason exists which justifies the court making an order for increased costs despite the principle that the determination of costs should be predictable and expeditious.

(4)The court may order a party to pay indemnity costs if—

(a)the party has acted vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing, or defending a proceeding or a step in a proceeding; or

…

(f) some other reason exists which justifies the court making an order for indemnity costs despite the principle that the determination of costs should be predictable and expeditious.

Indemnity costs

[11]   A Court has an overarching discretion to award indemnity under r 14.6(4)(a) of the Rules, when a party has acted “vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing, or defending a proceeding or a step in a proceeding”. This section has been engaged in several cases where serious allegations such as fraud which were made without a proper foundation.6

6      Smithkline Beecham (NZ) Ltd v Minister of Health (2002) 16 PRNZ 361 (HC); and Hedley v Kiwi Co-operative Dairies Ltd (Costs) (2002) 16 PRNZ 694 (HC) [Hedley].

[12]   Acting “unnecessarily” incorporates distinctly bad behaviour, and includes unfounded or irrelevant allegations of fraud or deceit.7 Indemnity costs may also be awarded when a party fails to abandon a claim involving fraudulent allegations when they lack substance which becomes apparent at a preliminary stage.8

[13]   Allegations of fraud were made in this case. It is apparent from the decision of the Judge that these were not supported by any evidence. The Judge noted that one of the applicant’s own witnesses described the allegation of fraud as based on the applicant’s “theory”. The applicant had merely doubted the financial ability of the respondents to acquire their home, and concluded that the only way they could have bought it was by taking money paid by the applicant to the first respondent for business travel.

[14]   The respondents referred to the decision in Agape-Holistic Retreat Corporation Ltd v Agape-High-Q Holistic Horsemanship Corporation Ltd (Agape)9 for the proposition that indemnity costs may be awarded where one party had sought to sustain a caveat when there were no grounds on which the party could succeed, even when the caveat was eventually withdrawn prior to the substantive hearing. In that case, the BNZ were successful in their application for costs against the applicant (AHRCL) who sought to sustain a caveat against a property held by the respondent (AHQHHC) who had a mortgage registered to the BNZ. Although the applicant believed it had a valid argument the Court concluded, “there was no reasonable legal basis” for the applicant to bring its application to sustain the caveat.10 There was a significant issue over the applicant’s entitlement to the caveat and the applicant did not address the issue until the application was issued. The process was therefore unnecessary as there were better avenues to address the matter.11

7      Hedley, above n 6, at [8]; citing Hawkins Construction Ltd v Chan (2002) NZTC 17,669 (HC).

8      Tri Media International Ltd v Wellington Company Ltd HC Wellington CIV-2008-485-2768, 15 July 2009; and Baxter v RM Group PLC HC Auckland CP262/01, 9 September 2003 at [56].

9      Agape-Holistic Retreat Corporation Ltd v Agape-High-Q Holistic Horsemanship Corporation Ltd

HC Auckland CIV-2007-404-004210, 15 May 2008 [Agape-Holistic Retreat Corporation Ltd].

10     Agape-Holistic Retreat Corporation Ltd, above n 9, at [27].

11 At [28].

[15]   In French v French,12 a matter had been heard under urgency following the respondent lodging a caveat against the title to a property owned by that respondent’s brother and his wife. The Judge held that it was “crystal clear the respondent had no entitlement to lodge the caveat and, further, he must have known that”.13 An order was made for costs to be paid in full on an indemnity basis.

[16]   The Court of Appeal in Bradbury v Westpac Banking Corp14 provided a summary of the circumstances, from the Federal Court of Australia, in which indemnity costs have been ordered. They were:

(a)the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud;

(b)particular misconduct causing loss of time to the Court and to other parties;

(c)commencing or continuing a proceeding for some ulterior motive;

(d)doing so in wilful disregard of known facts or clearly established law; and

(e)making allegations which ought never to have been made or unduly prolonging a case by groundless contentions, as summarised as, the “hopeless case” test.

Increased costs

[17]   Pursuant to r 14.6(3)(b) of the Rules, increased costs may be awarded for taking or pursuing an argument that lacks merit or which unnecessarily contributes to the time and expense of the proceeding or quantum should be determined by scale

12 French v French HC Auckland CIV-2010-419-661, 17 August 2010.

13 At [5].

14 Bradbury v Westpac Banking Corp [2009] 3 NZLR 400 (CA) [Bradbury] at [29], endorsing Goddard J’s adoption in Hedley, above n 6 at [11], adopting Colgate Palmolive Co v Cussons Pty Ltd (1993) 118 ALR 248 (FCA).

costs rather than actual costs, with an uplift that should not normally exceed 50 per cent.15

[18]   Increased costs may also be awarded if there is some other reason to justify a court imposing increased costs (r 14.6(3)(d)). This may include fraud when there is a lack of substance behind the allegations.16

Submissions

First memorandum for costs from the respondents

[19]   The respondents accept that indemnity costs are the exception rather than the norm, but say that this is an exceptional case. They say the allegations were serious allegations of fraud/deceit and there was no probative evidence to support the applicant’s “theory” of fraud or misappropriation of funds.

[20]   Therefore, they seek indemnity of $19,763.19 (inclusive of disbursements) or, in the alternative, costs on a 2B basis with a 50 per cent uplift, totalling $15,594.75.17 Both figures would include $1,200 for the costs associated with the costs application on a 2B basis.

[21]   The respondents submit that extensive affidavit evidence was required, noting that reply affidavits of Mr Tsumakura in support of the applicant raised new matters for which further reply affidavits were required.

[22]   In a second memorandum the respondents noted that, despite the substantive judgment, no steps had been taken by the applicant to remove the caveat. An order was sought for the caveat to be removed by the third respondent, Land Information New Zealand. At that stage no steps had been taken by the applicant to address costs. Following the second memorandum counsel for the applicant indicated to the Registrar saying “I will have a response by the middle of next week”.

15     Holdfast N Ltd v Selleys Pty Ltd (2005) 17 PRNZ 897 (CA); and Bradbury, above n 14.

16     Baxter v RM Group PLC HC Auckland CP262/01, 9 September 2003 at [31] and [56]. For example allegations of deceit and fraud where there is lack of substance in those claims.

17     High Court Rules 2016, r 14.6(1)(a).

Applicant’s memorandum in opposition and the respondents’ memorandum in reply

[23]   The applicant submits that an uplift in costs is inappropriate and that costs should be awarded on a band A basis. The applicant submits that indemnity costs are reserved for serious examples of wastage and are exceptions rather than the norm. It says the present case does not constitute an exceptional case as the substantive application was legitimately brought in the circumstances where, the applicant says, “an employee has still failed to properly to [sic] account to his former employer for a sizable sum of money”. The applicant says the respondents could have accounted as requested rather than taking the matter to Court and thereby accruing legal costs.

[24]   The applicant also notes that the sums sought for costs are “misconceived and at odds with the costs regime”, suggesting that practitioners run the risk of being accused of profiting under the costs regime. The applicant also submits that the invoiced rate would reach $300 plus GST per hour and would amount to 60 hours of work.

[25]   The applicant submits that the case was neither complex nor overly onerous except for one overseas affidavit. It also notes there was no full trial but the matter was limited to the question of whether there was enough of a basis to sustain a caveat. Moreover, it says, there is a policy reason not to award indemnity costs as such awards as it would discourage others using the court in civil matters in similar proceedings.

[26]   In reply, the respondents note that the focus is on the fact that a serious allegation of fraud/deceit was made, rather than the complexity of the matter or whether or not a full trial was required. In addition they say that rates of up to $450 per hour are not out of the ordinary for what is reasonable for legal costs these days and given the allegations of fraud/deceit this is an exceptional case, in which additional legal costs were incurred and costs on a 1A basis would be inadequate.

[27]   The respondents, in reply, point to a “failure” of the applicant to provide the ringis/arrangement budgets until reply affidavits were exchanged and that, in any case, the onus to provide the information fell on the applicant.

Analysis

[28]   Like the applicant in Agape, the applicant in this case believed it had a valid argument. The issue of fraud was not the sole issue in dispute but it was the vehicle used to argue for the sustenance of the caveat. Disputes remain between the parties which cannot be resolved in an application to sustain a caveat. The parties have differing views on the issue of reporting on the ringis, accounting for advances and of the applicant’s standing. These matters are noted in the substantive judgment.18

[29]   However, as noted in Bradbury v Westpac Banking Corp, it is the making of allegations of fraud knowing them to be false which might attract an exceptional costs award.

[30]   In this case the allegations of fraud appear to have been made recklessly in order to support a claim of constructive trust. The Judge found no evidential basis for the serious allegations of fraud. Any such allegation must have an evidential foundation. Even the applicant’s witness described the claims as being the applicant’s “theory”. The allegations were “unsupported by any probative evidence”.

[31]   One of the policy reasons behind awarding increased or indemnity costs in cases involving unsupported allegations of fraud are that such awards might discourage others using the court in civil matters such as these, to make serious allegations without proper evidential foundations.

[32]   The lack of complexity and a full trial does not preclude the awarding of indemnity or increased costs. The serious nature of allegations and complexity of the arrangements, the reasonable urgency involved as well as the obtaining of an overseas affidavit required the respondents’ lawyers to spend considerable time on the matter. Reasonable costs always fall within a range. I am satisfied the actual costs are within that range in the circumstances. However, I am not required to determine that issue as I propose awarding increased costs as a percentage of a 2B costs award.

18     Substantive Judgment, above n 1, at [10] and [11].

[33]   I consider this is a case where increased costs are appropriate in view of the serious allegations and the lack of substance to them.

[34]   I consider that an increased costs award and additional 50 per cent over scale costs is appropriate in this case.   The increased costs are best characterised under     r 14.6(3)(b)(ii), as being justified as the argument to sustain the caveat lacked merit and was inherently unlikely to succeed, in which case increased costs apply to all steps.19

[35]   I do not consider this is a case which justifies indemnity costs as the allegations were not the most serious of this kind and the applicant did not make the allegations without some logic behind them – albeit the logic was flawed and was immediately exposed as such by the respondents. I consider this was not the most serious end of the range of such allegations but nevertheless it justifies an increase of 50 per cent above a category 2B basis award. A 2B allocation is appropriate given that the matter was not straightforward and required considerable time and attention. The award is also an indication of the dim view taken by the Court concerning the making of the allegations of fraud without substance.

Result

[36]   Increased costs are awarded  to  the  respondents  by  way  of  an  uplift  of  50 per cent on category 2 band B together with disbursements as claimed.

Orders

[37]   The first and second respondents (jointly) are awarded the sum of $15,594.75 calculated on the basis of an increase of 50 per cent over costs on a 2B basis as set out in their submissions together with an additional award of $1,200 for the costs associated with the costs application.

19     Broadspectrum (New Zealand) Ltd v Nathan [2017] NZCA 434 at [57]; citing NR v MR [2014] NZCA 623 at [52].

[38]   I also order that caveat 11431321.1 be removed from the title of the Property at 42 Newcastle Street, Palmerston North (WNC 2/930, Lot 2, DP24962).

Grice J

Solicitors:

Iorns Legal, Porirua for the applicant

Alison Green Law, Palmerston North for the first and second respondents