Stacey v Watson
[2016] NZHC 2781
•23 November 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-000525 [2016] NZHC 2781
BETWEEN NORMAN WILLIAM STACEY
First Plaintiff
NORMAN WILLIAM STACEY, ANNE LOUISE SERRA AND KERRY DALE MCINTOSH
Second Plaintiffs
AND
DOROTHY VICKI WATSON First Defendant
DOROTHY VICKI WATSON AND DVW TRUSTEE LIMITED
Second Defendants
On the papers Counsel:
P J Dale for Plaintiffs
J Q Wilson and C M Cattin for DefendantsJudgment:
23 November 2016
COSTS JUDGMENT OF GILBERT J
This judgment is delivered by me on 23 November 2016 at 1 pm pursuant to r 11.5 of the High Court Rules.
..................................................... Registrar / Deputy Registrar
Counsel:
P J Dale, Barrister, Auckland
Bell Gully, Auckland
STACEY & ORS v WATSON & ORS [2016] NZHC 2781 [23 November 2016]
[1] In a judgment delivered on 16 August 2016, Faire J dismissed the plaintiffs’ claims against the defendants seeking damages for alleged breach of fiduciary duty or for relief pursuant to s 174 of the Companies Act 1993 for allegedly oppressive and unfairly prejudicial conduct.1 These claims arose out of the sale in June 2014 of the businesses formerly conducted by two companies owned and directed by the parties. The plaintiffs claimed that the defendants received undisclosed benefits
from the sale transactions and that the return the plaintiffs received was less as a consequence.
[2] The Judge found that no fiduciary duty was owed by the defendants to the plaintiffs. In dismissing the alternative claim under s 174, the Judge found that the first defendant’s conduct did not cause the plaintiffs any loss, nor did they suffer any prejudice. The Judge expressed his preliminary view that costs should be awarded to the defendants on a category 2, band B basis but indicated that memoranda should be filed if the parties could not agree.
[3] The parties have been unable to agree on the issue of costs. Although Faire J does not formally retire until later this year, he is on leave and is not available to deal with the matter. It has accordingly been referred to me.
[4] The defendants rely on four Calderbank offers they made to settle the proceeding in support of their claim for increased costs for steps taken after these offers were made. They seek a proportion of their actual costs for these steps, or, alternatively, scale costs increased by 50 per cent. The plaintiffs submit that costs should be awarded to the defendants on a 2B basis without any increase.
[5] Having reviewed the file and the judgment, I consider that although the plaintiffs’ claims were not strong, they were not wholly lacking in merit. The outcome was always going to depend on the factual findings. Although the defendants succeeded, the Judge was critical of both parties’ conduct. The Judge considered that the first defendant “should have, as a director, disclosed the exact
nature of her interests in the transactions in a clearer manner”.2 In the normal
course, 2B costs would clearly be an appropriate response in a case such as this. The issue is whether increased costs are appropriate to take account of the Calderbank offers. This turns on whether it can be said that the plaintiffs failed, without reasonable justification, to accept one or other of these offers.
[6] The proceeding was filed on 16 March 2015. Damages were initially claimed in the sum of $835,000. The claim was subsequently reduced to $435,000 in the amended statement of claim filed in April 2016. The hearing took place in July 2016 and the judgment was delivered in August 2016.
[7] Although the Judge did not need to determine damages because of his liability findings, he indicated in the judgment that he considered that the damages were significantly overstated and in any event would need to be reduced to reflect some responsibility on the part of the plaintiffs.3 The amount realistically in issue was modest.
[8] The defendants made the following Calderbank offers: (a) 23 July 2015 - $30,000.
(b) 4 April 2016 - $30,000. (c) 3 June 2016 - $85,000. (d) 4 July 2016 - $175,000.
[9] In Calderbank v Calderbank, the English Court of Appeal endorsed an approach whereby a party seeking to compromise a dispute could make a settlement proposal on a “without prejudice” basis but reserving the right to refer to it on the issue of costs.4 The Court found that Mrs Calderbank’s settlement proposal should have been accepted by Mr Calderbank. Because he rejected the offer, persisted in the proceedings through to judgment but received less than was offered, the Court
considered that Mr Calderbank was only entitled to costs up to the date of the offer and that Mrs Calderbank should be awarded costs for the proceedings after that date.
[10] The Calderbank process now has statutory recognition in r 14.10 of the High Court Rules. Rule 14.11 makes clear that costs remain at the discretion of the Court even where such an offer is made. Subject to this, the usual effect of such an offer is to displace a plaintiff’s presumptive entitlement to costs if he or she succeeds with the claim but for less than the amount offered by a defendant. In these circumstances, the defendant has a presumptive entitlement to costs after the date of the offer. This is set out in r 14.11(3):
Party A is entitled to costs on the steps taken in the proceeding after the offer is made, if Party A –
(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.
[11] This rule provides a mechanism for a defendant, who recognises his or her exposure to a claim, to gain protection against an adverse costs award in the event that the plaintiff succeeds, but for an amount less than was claimed. To have any effect on costs, the offer has to exceed the amount achieved by the plaintiff in the judgment. Such offers therefore need to be set at a realistic level. From the plaintiff’s perspective, the consequence of rejecting such an offer is that he or she can succeed with the claim but nevertheless be required to pay costs to the defendant for steps taken after the offer is made. The rule encourages parties to reach a reasonable settlement.
[12] Rule 14.11(3) does not apply in this case because the defendants succeeded outright and are therefore entitled to costs both before and after the offers were made. However, the offers can be taken into account in support of the defendants’ claim for increased costs under r 14.6. This relevantly provides:
(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 –
…
(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;
…
[13] I do not consider that the first two offers of $30,000 can have any bearing on the incidence of costs. These offers fell well short of the likely judgment sum had the plaintiffs succeeded in establishing a breach of fiduciary duty or unfairly prejudicial conduct. Acceptance of these offers would effectively have required the plaintiffs to abandon their claims. Because their claims had merit, I consider that the plaintiffs had reasonable justification for rejecting these offers and continuing with their claims.
[14] The offer made on 3 June 2016 in the sum of $85,000 does not justify increased costs. The fact that the defendants acted reasonably in rejecting this offer is demonstrated by the fact that the plaintiffs offered more than double this amount four weeks later. The later offer reflects the defendants’ assessment of the amount that would be worth paying at that time to protect their exposure to the claim and to save irrecoverable trial costs. In the light of that assessment, it is difficult to see how it can be suggested that the plaintiffs had no reasonable justification for rejecting the earlier offer and persisting with their claims at that stage.
[15] The final offer of $175,000 is the only offer that could justify increased costs being awarded. This offer was made late, only one week prior to the commencement of the trial. By then, the plaintiffs would have incurred considerable costs and they would have been entitled to a contribution to those costs had they succeeded. The plaintiffs would also have been entitled to some interest on their claims. The plaintiffs may reasonably have viewed this offer as being less than the amount they could expect to recover if they succeeded with their claims. However, the plaintiffs should have recognised that there was a significant risk that their claims would fail entirely. They should also have appreciated that the damages were likely to be significantly less than the amount they claimed even if they did succeed. The further costs to both parties of proceeding to trial were likely to be substantial and potentially disproportionate to the amount realistically in issue. The defendants’
legal costs for the month of July 2016, being the actual costs of the trial, amounted to nearly $130,000.
[16] Given the real risk that the plaintiffs’ claims would fail altogether or succeed only for a modest sum, and taking into account the high costs of trial yet to be incurred, I consider that the plaintiffs should have accepted this offer rather than proceeding to trial. In my view, the offer represented a reasonable assessment of trial risk and the range of likely outcomes balanced against the cost. Taking into account all relevant matters including the lateness of the offer, the limited time for acceptance (two days), and the fact that the offer was reasonable but not generous, I consider that an uplift of 25 per cent on scale, limited to the costs of the trial itself, is appropriate to reflect the defendants’ failure to accept this offer.
Result
[17] The defendants are entitled to costs against the plaintiffs for all steps in the proceeding. These costs, other than trial costs, are to be calculated on a category 2, band B basis. The defendants are entitled to an uplift of 25 per cent on 2B costs for the trial itself. I allow for second counsel. The defendants are also entitled to
recover reasonable disbursements.
M A Gilbert J
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