TheCircle.co.nz Ltd v Trends Publishing International Ltd (in liq and in rec)
[2021] NZCA 235
•4 June 2021 at 10.45 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA425/2020 [2021] NZCA 235 |
| BETWEEN | THECIRCLE.CO.NZ LIMITED |
| AND | TRENDS PUBLISHING INTERNATIONAL LIMITED (IN LIQUIDATION AND IN RECEIVERSHIP) |
| Hearing: | 15 March 2021 |
Court: | Clifford, Brewer and Dunningham JJ |
Counsel: | R B Hucker and R F Selby for Appellants |
Judgment: | 4 June 2021 at 10.45 am |
JUDGMENT OF THE COURT
AThe appeal is allowed in part.
BThe High Court’s indemnity costs order is quashed and substituted for an order of standard scale costs uplifted by 50 per cent. We remit the quantification of those costs to the High Court if the parties are unable to agree.
D We make no order as to costs.
____________________________________________________________________
REASONS OF THE COURT
(Given by Clifford J)
Introduction
In April 2019 Powell J in the High Court at Auckland dismissed a counterclaim by Trends Publishing International Ltd (Trends) for damages of $61 million from Callaghan Innovation (Callaghan) for breach of contract and statutory duties.[1] That judgment has not been appealed.
[1]Trends Publishing International Ltd v Callaghan Innovation [2019] NZHC 907 [Substantive judgment].
At the conclusion of his judgment the Judge found Callaghan was entitled to costs. If these could not be agreed, he would determine the issue after the filing of memoranda.[2]
[2]At [235].
The parties were unable to agree. Callaghan subsequently requested that indemnity costs be ordered, not only against Trends, but also against two non-parties: the first and second appellants TheCircle.co.nz Ltd (The Circle) and David Johnson.
Callaghan sought costs on an indemnity basis in the sum of $1,020,445.02 together with disbursements of $434,212.37, a total of $1,454,657.39. After the deduction of $50,000 security for costs paid by Trends and already released to Callaghan, this resulted in a total claim of $1,404,657.39 for costs and disbursements.[3]
[3]Trends Publishing International Ltd (in rec and liq) v Callaghan Innovation [2020] NZHC 1626 [Costs judgment] at [3].
The Judge awarded Callaghan payment of indemnity costs of $1,020,445.02 together with disbursements of $303,823.66, and ordered, as Callaghan had sought, that those amounts were payable The Circle and Mr Johnson as non‑parties.[4] After a deduction of the $50,000 security for costs already paid to Callaghan, this left a balance of $1,274,268.68 for which judgment was given.[5]
[4]At [86].
[5]At [87].
Both Trends and The Circle were owned and controlled by Mr Johnson. The Circle had funded Trends’ claim against Callaghan. The Judge concluded Mr Johnson’s and The Circle’s roles in that litigation justified the non-party order.[6]
[6]At [84]–[85].
Trends was placed in receivership and then in liquidation after the April 2019 substantive judgment. The liquidators have played no part in this costs dispute.
Mr Johnson and The Circle now appeal.
Background
In 1982 Mr Johnson established, and thereafter successfully expanded, Trends in his roles as its sole shareholder and director. Trends’ business comprised the publication in New Zealand and elsewhere of a suite of magazines aimed at the home ownership and improvement markets. Different magazines targeted different geographic and home market segments. They all featured copy designed to appeal to a wide range of participants in those markets, perhaps most obviously retail consumers, and carried related advertising. By 2007, Trends was operating in the United States of America, Australia, Singapore, Malaysia, Hong Kong, Indonesia, Dubai, China, India and Canada, as well as New Zealand.
The growth of online marketing platforms challenged the Trends business model. In 2012 Trends successfully applied to the then Ministry of Science and Innovation (MSI) for a project grant to assist it to digitise its business by moving it onto what was described as a “global online vertical marketing platform”.[7]
[7]Substantive judgment, above n 1, at [20].
Following what Powell J described as the “successful completion” of that grant,[8] in late 2013 and early 2014 Trends investigated further similar funding. By then, the role MSI had had in the allocation of Crown research and development funding had been transferred to Callaghan. Trends applied to Callaghan for a further grant.
[8]At [23].
In its grant application, Trends described the research and development work it proposed, in very similar terms to those it had used when applying to MSI. The application was successful, and Trends and Callaghan entered into a Funding Agreement for an R&D Growth Grant on 2 April 2014 (the Funding Agreement). In the Funding Agreement that research and development work was referred to as the “Programme”. The Funding Agreement entitled Trends to reimbursement of 20 per cent of its expenditure on “Eligible R&D” incurred in carrying out the Programme up to a maximum of $5 million in each year of the agreement.
Trends’ first two claims for reimbursement, for the first and second quarter of 2014, were met by Callaghan. When Trends sought reimbursement for the third quarter of 2014, Callaghan sought further information from Trends. That information did not address Callaghan’s concerns. Deloitte New Zealand Ltd were commissioned to investigate in November 2014 and provided its draft report to Callaghan in December 2014. In essence, that report concluded the expenditure for which reimbursement was claimed by Trends, although similar if not identical to expenditure which had been reimbursed under the previous grant from MSI, did not constitute Eligible R&D.
Matters came to head on 17 December 2014. Callaghan met with Trends that day and delivered it a letter suspending the Funding Agreement. At the same time Callaghan provided Trends with a copy of a press release for issue that day. In addition to announcing the suspension of the Funding Agreement, that press release stated that “[t]he matter has also been referred to the Serious Fraud Office”.[9]
[9]At [129].
The Supreme Court subsequently observed “[t]here can be no doubt that this press release had an adverse impact on the ability of Trends to continue trading”.[10]
[10]Trends Publishing International Ltd v Advicewise People Ltd [2018] NZSC 62, [2018] 1 NZLR 903 at [12].
Following delivery of Deloitte’s final report, in April 2015 Callaghan purported to cancel the Funding Agreement and demanded repayment of the grants paid. On 12 May 2015 Trends proposed a compromise with its creditors.[11] The proposal documents attributed Trends’ financial difficulties to the actions of Callaghan.
[11]Companies Act 1993, s 228(1).
The compromise was supported by Mr Johnson, The Circle and various associated interests who at the time of the meeting controlled more than 75 per cent of the creditors’ vote by value. The Circle, Trends’ landlord, was its largest single creditor. The proposal was approved at a creditors’ meeting on 22 May 2015.
Callaghan, and several other creditors, subsequently applied to the High Court to have the compromise set aside. In opposing that application Trends commenced its counterclaim against Callaghan for damages of some $61 million.
From 2016 onwards, as Mr Johnson confirmed, The Circle funded Trends’ claim against Callaghan.
The challenge to the compromise was determined before Trends’ counterclaim for damages. That challenge was successful in the High Court,[12] upheld in this Court in 2017,[13] and in the Supreme Court in 2018.[14]
[12]Advicewise Ltd v Trends Publishing International Ltd [2016] NZHC 2119.
[13]Trends Publishing International Ltd v Advicewise People Ltd [2017] NZCA 365, [2017] NZCCLR 7.
[14]Trends Publishing International Ltd v Advicewise People Ltd, above n 10.
Trends’ counterclaim was heard in the High Court in August 2018. In the course of the hearing the Judge split that claim between liability and quantum. In his 30 April 2019 substantive decision, Powell J found against Trends as regards each of the bases upon which Trends said Callaghan had acted unlawfully in suspending the grant, announcing that suspension and subsequently terminating the grant.[15]
[15]Substantive judgment, above n 1.
The Judge reserved the question of costs.[16] As already indicated, in his separate costs judgment of 10 July 2020 the Judge awarded indemnity costs and disbursements against Trends totalling $1,274,268.68 (after the deduction of $50,000 Trends had paid for security) and ordered that those costs were the joint and several liability of Trends and the non-parties, The Circle and Mr Johnson.
Issues on appeal
[16]At [235].
The High Court awarded indemnity costs to Callaghan on the basis that Trends’ claim against Callaghan was “fundamentally misconceived or otherwise hopeless from conception”.[17] In doing so the Judge referred to the leading authority on indemnity costs, Bradbury v Westpac Banking Corp,[18] and the “hopeless case” test articulated by French J in the Federal Court of Australia in J Corp Pty Ltd v Australian Builders Labourers Federation Union of Works (WA Branch) (No 2).[19]
[17]Costs judgment, above n 3, at [18].
[18]Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] 3 NZLR 400 [Bradbury].
[19]J Corp Pty Ltd v Australian Builders Labourers Federation Union of Workers (WA Branch) (No 2) (1993) 46 IR 301 (FCA) at 303.
As regards Callaghan’s application for orders against Mr Johnson and The Circle as non-parties the Judge concluded:
[81] It is clear that in the circumstances of this case, Mr Johnson and The Circle promoted and funded proceedings by an already insolvent company substantially for their own financial benefit and in consequence are liable for the costs of the claim, which as I have already determined should be on an indemnity basis.
In arguing the appeal, Mr Hucker went to considerable lengths to challenge the correctness of the Judge’s decision to decline all Trends’ claims against Callaghan. Whether or not that judgment was correct is not the issue here. This is not an appeal against the substantive judgment nor, given that, could there be an argument that costs in that dispute as between Trends and Callaghan should not follow the event: the event being Callaghan’s success.
Rather, the issues in this appeal are those of hopelessness so as to justify indemnity costs, the quantum of disbursements ordered and the appropriateness of the non-party orders. We consider the challenge to the non-party orders first.
The non-party orders
We are satisfied the Judge was entitled to order that any costs awarded to Callaghan against Trends be payable by the non-parties, Mr Johnson and The Circle.
Mr Hucker challenged that order on the basis that the steps taken in the litigation were for Trends’ corporate benefit, and so the Judge’s reliance on the factors of control and financial interest had been misplaced. The roles played by Mr Johnson and The Circle were unremarkable in the context of the commercial reality of closely held company operations in New Zealand.
We are not persuaded by that argument. On this issue, it is sufficient for us to endorse the Judge’s reasoning:[20]
[20]Costs judgment, above n 3.
[82] This was not a simple case of related party advances, nor was the litigation simply to recover monies to be applied for creditors and shareholders generally. Likewise, by no conceivable stretch of the imagination could the actions of either Trends or the non-parties be considered as falling within the liquidator’s exception identified by the Privy Council in Dymocks.[21] In particular:
[21]Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2004] UKPC 39, [2005] 1 NZLR 145 [Dymocks].
(a) Until its recent liquidation Trends was under the control of Mr Johnson, who by the time the substantive claim against Callaghan was heard was Trends’ sole director, that Trends was “a 100 per cent owned by [Mr Johnson], controlled by [him] and his interests”.
(b) The Circle is likewise under the control and ownership of Mr Johnson.
(c) Trends was likely insolvent from some time in 2013 and certainly by early 2015.
(d) The Circle is and has been for a considerable period the largest creditor of Trends. As of May 2015, at the time the Trends compromise was proposed, the Supreme Court noted The Circle was owed $3,080,381.80 out of total creditors (including Callaghan and “insider creditors”) of $4,343,843.23. Trends’ creditors (excluding Callaghan and “insider creditors”) amounted to $716,660.33.
(e) As early as December 2016, Mr Johnson confirmed that Trends was not paying for the legal costs in pursuing its counterclaim against Callaghan:
Trends sister company [The Circle] is meeting all the costs. So pursuing the counterclaim does not have any effect on Trends’ fund available ...
[83] As even this brief summary demonstrates, the suggestion that The Circle was a mere funder cannot be sustained, nor the argument that pursuit of the counterclaim against Callaghan was substantially for the benefit of creditors of Trends, let alone that Mr Johnson and/or The Circle were in any way acting in a similar manner to liquidators.
[84] On the contrary, it is clear that the approach taken by Mr Johnson and together with The Circle stands in marked contrast to the situation considered by the Court of Appeal in Kidd v Equity Realty in which a non-party costs order was found to be inappropriate simply because the director controlled the company and the company subsequently became insolvent.[22] Instead, it is abundantly clear that in this case the principal potential beneficiaries of the counterclaim given the quantum sought ($61 million) and the lack of creditors other than The Circle, were clearly Mr Johnson and The Circle and it is artificial to attempt to draw a distinction between the two. Mr Johnson through his ability to control both Trends and The Circle controlled both the direction of the litigation and the funding of it, with The Circle willingly providing the funds to enable the counterclaim to proceed. This clearly took them into the category identified by the Privy Council in Dymocks as non-parties who “promote and fund proceedings by an insolvent company solely or substantially for [their] own financial benefit” and who “should be liable for the costs if [their claim] fails”.[23]
(Original footnotes omitted.)
[22]Kidd v Equity Realty (1995) Ltd [2010] NZCA 452.
[23]Dymocks, above n 21, at [29].
The real question here is whether, as the Judge concluded, Trends’ case against Callaghan was hopeless from the outset so as to justify the award of indemnity costs.
The indemnity costs award
Legal principles
Indemnity costs are governed by r 14.6(1)(b) of the High Court Rules 2016. The leading case on indemnity costs is Bradbury v Westpac Banking Corp, where this Court distinguished between the three costs scales:[24]
(a)standard scale applies by default where cause is not shown to depart from it;
(b)increased costs may be ordered where there is failure by the paying party to act reasonably; and
(c)indemnity costs may be awarded where that party has behaved either badly or very unreasonably.
[24]Bradbury, above n 18, at [27]
There are several categories of conduct in which indemnity costs have been awarded:[25]
(a)the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud;
(b)particular misconduct that causes loss of time to the court and to other parties;
(c)commencing or continuing proceedings for some ulterior motive;
(d)doing so in wilful disregard of known facts or clearly established law;
(e)making allegations which ought never to have been made or unduly prolonging a case by groundless contentions, summarised in French J’s “hopeless case” test.
[25]At [29], citing Hedley v Kiwi Co-operative Dairies Ltd (2002) 16 PRNZ 694 (HC) at [11]; and Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225.
As regards the “hopeless case” category, this Court has explained:[26]
[17] The reference to French J’s “hopeless case” test is to an observation made by French J (now Chief Justice of Australia) in J Corp Pty Ltd v Australian Builders Labourers Federation Union of Workers (WA Branch) (No 2) that indemnity costs may be awarded where “a party persists in what should on proper consideration be seen as a hopeless case”. French J relied on an earlier decision in which Woodward J said that it was appropriate to consider awarding indemnity costs “whenever it appears that an action has been commenced or continued in circumstances where the applicant, properly advised, should have known that he had no chance of success”. Woodward J added that such a case must be presumed to have been commenced or continued for an ulterior motive or because of some wilful disregard of the known facts or the clearly established law. In that case the presumed ulterior motive was to pressure the respondents to settle. The other possibility was that the proceeding was pursued for no good purpose at all, due to inertia and carelessness.
[26]Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2014] NZCA 348, (2014) 22 PRNZ 322 (footnotes omitted).
The Court went on to note that it is not necessary under this category of conduct justifying indemnity costs that there be flagrant misconduct.[27] In Mawhinney v Auckland Council this Court has recently considered, in the context of s 166 of the Senior Courts Act 2016, the threshold concept of proceedings that are “totally without merit”.[28] In doing so the Court relied on English jurisprudence that equates that phrase with the phrases “bound to fail” or, in other words, “hopeless”.[29] It follows that the conclusion a case is hopeless so as to justify an award of indemnity costs is not one that can be based on fine distinctions or complex reasoning. We approach this appeal accordingly.
Analysis
[27]At [27].
[28]Mawhinney v Auckland Council [2021] NZCA 144.
[29]At [50]–[53], citing R (Grace) v Secretary of State for the Home Department [2014] EWCA Civ 1091, [2014] 1 WLR 3432.
Trends sued Callaghan for breach of contract and statutory duties based on the Funding Agreement. Put simply, it said the expenditure on which it based its claims for payment under the Funding Agreement constituted qualified Eligible R&D Expenditure, and in determining otherwise Callaghan had not only breached the explicit terms of the Funding Agreement, but also failed to comply with statutory and/or implied duties to act fairly and reasonably. Those duties were said to extend to accepting claims from Trends for reimbursement of expenditure incurred in carrying out the Programme, as reflected in the background section of the Funding Agreement in the following terms:
B. You have applied to Callaghan Innovation for a funding grant to cover a portion of the costs of your research and development programme (“Programme”) for a minimum of 3 years. The Programme is referred to in the schedule to this Agreement (“Schedule”) and described in detail in your application and your research and development plan (“Application”).
C. Your Application has been approved, and Callaghan Innovation will provide the funding specified in the Schedule to enable you to carry out the Programme (“Funding”).
D. The purpose of this Agreement is to govern the investment of the Funding in the Programme …
Trends also claimed that the public announcements made on 17 December 2014 breached the confidentiality provisions in the Funding Agreement.[30]
[30]We note that Trends also challenged Callaghan’s subsequent press release regarding termination of the Funding Agreement on 21 April 2015 on the same grounds.
In reaching his conclusion that Trends’ case was hopeless, the Judge focused on what he termed Trends’ fundamental misconception of the terms of the Funding Agreement and, in particular, as to the type of expenditure for which it was entitled to be reimbursed by Callaghan. As he put it:[31]
[19] … The Funding Agreement is in fact clear that Trends was only able to seek reimbursement of 20 per cent of eligible research and development expenditure (“Eligible R&D Expenditure”). Despite this, it was clear from the evidence that Trends never undertook a formal calculation as to what portion of its expenditure was Eligible R&D Expenditure entitled to be claimed under the Funding Agreement. …
[20] More fundamentally, the evidence, both contemporary and that produced at trial by Trends, provided no basis for concluding that any of the expenditure claimed by Trends was in fact Eligible R&D Expenditure for the purposes of the Funding Agreement. …
[31]Costs judgment, above n 3 (footnote omitted).
The Judge went on to support that conclusion by reference to the evidence of Mr Groves, Trends’ Financial Controller and Chief Financial Officer. The Judge said that evidence had made it clear that in claiming grant monies Mr Groves had never considered whether the amounts being claimed were in fact Eligible R&D Expenditure, nor was there any evidence to suggest they were. Rather, Mr Groves provided no explanation as to how he ultimately determined the extent of the labour committed to the project nor how it constituted Eligible R&D Expenditure. The Judge noted that Mr Groves’ analysis purported to show all but four of the employees listed were working 100 per cent on Eligible R&D Expenditure.[32]
[32]At [20].
The lack of any contemporaneous evidence supporting the claims for reimbursement of Eligible R&D Expenditure was compounded by the unreliability of the expert evidence Trends called at trial. As the Judge put it:
[28] The lack of any documentary support for the amounts claimed by Trends under the Funding Agreement, let alone that such claims were Eligible R&D Expenditure for the purposes of the Funding Agreement should have been blindingly obvious to Trends from the start of the Deloitte investigation and certainly well before the present proceedings were filed. By pursuing the claim, in terms of Bradbury v Westpac, Trends misconduct was flagrant. As it never addressed these fundamental issues Trends was unable to show that Callaghan breached its obligations to Trends when it first suspended and then terminated the Funding Agreement, noting instead by the time closing submissions were presented Trends in fact accepted inaccurate information had been provided to Callaghan in breach of clause 10.4(b) of the Funding Agreement. This was in fact the inevitable result of Trends failure to keep sufficient records and led to it claiming monies to which it was not entitled — the other two breaches of the Funding Agreement (clauses 5.1 and 10.4(c) respectively) for which Callaghan had terminated the Funding Agreement.
(Footnotes omitted.)
As the Judge had said in his substantive judgment:[33]
[211] The expert evidence Trends relies upon to justify its claims from Dr Milner and Mr Basrur likewise provides no justification for the amounts claimed. Instead, it is fundamentally misconceived. It focusses on whether Trends was completing the project as set out in the application, rather than whether the funding claimed was Eligible R&D Expenditure for the purposes of the Funding Agreement.
[33]Substantive judgment, above n 1.
We agree with that assessment, save as regards one matter. That is, the possible significance of the fact that Trends’ application for grant funding, as recorded in the Funding Agreement, was made on the basis of the Programme described in its application and that was in fact the work which it did carry out. It was not until two claims had been made and accepted that Callaghan focused on the question which dominated the trial, namely whether expenditure incurred in carrying out the Programme did, in fact, constitute Eligible R&D Expenditure.
Significantly, there had been concerns within Callaghan from the outset — that is, before the Funding Agreement was signed — as to the eligibility of Trends’ claims; concerns which were not communicated to Trends. The Judge acknowledged that matter in his judgment in the following way:
[36] In assessing Trends’ application, Callaghan took a very narrow view of what it was required to assess. The majority of those considering the application concluded that Callaghan was bound to approve Trends’ application if Trends could establish that it met the business eligibility criteria as a New Zealand business and, as outlined in the Minister’s Direction:
• have had at least $300,000 in eligible R&D expenditure … sourced from non-government funds in each of the two most recent years;
• have had eligible R&D expenditure of at least 1.5 per cent of revenues in each of the two most recent years;
• meet financial and management due diligence requirements sufficient to justify three years of funding; and
• provide Callaghan Innovation with a R&D plan including an estimate of R&D expenditures over the next three years. Businesses must compile the R&D plan to a level of detail and clarity sufficient to assess progress in the businesses’ R&D programme over time.
[37] As a result, Callaghan did not consider the nature of the research and development proposed to be undertaken by Trends but instead limited its analysis to the factors set out in [36] above. Callaghan therefore obtained auditor’s reports with regard to Trends’ financial position, as well as a statement from Moore Stephens Markhams confirming Trends’ historical research and development expenditure. While this confirmed Trends had undertaken research and development over a two year period, it did not identify whether that historical research and development expenditure was Eligible R&D Expenditure for the purposes of the Growth Grant. Indeed, Moore Stephens Markhams confirmed:
The Research and Development expenditure disclosed above is related to expenditure on research, particularly in areas of gaining understanding of marketing opportunities, insight into current and future users experiences on large scale global platform, established a pathway for the current media to digital transition. Research expenditure it is recognised as expense when it is incurred.
(emphasis added)
[38] Thus while Callaghan identified some issues around Trends’ financial position, it did not look at what Trends said it was intending to develop, the Project itself. It therefore made no real attempt to understand and/or provide feedback to Trends on what parts of Trends’ stated research and development programme would constitute Eligible R&D Expenditure for the purposes of the Growth Grant. The lack of focus on what Trends was actually intending to do clearly concerned a number of the Callaghan staff tasked with assessing the application, but ultimately Callaghan concluded it could not decline the application. …
We accept it clearly was hopeless for Trends to try and prove that all the expenditure on which it had based its claim for grant payments constituted Eligible R&D Expenditure. But we are not necessarily convinced it would have been hopeless for Trends to argue that, in the circumstances:
(a)Callaghan had known or had concerns from the outset as to the eligibility of Trends’ claims.
(b)It had based its approval of Trends’ application on an acceptance that Trends had incurred Eligible R&D Expenditure in the past when, it could only be, doing similar work to the Programme.
(c)Those matters affected the interpretation of the Funding Agreement and of Trends’ entitlements thereunder.
Having said that, the focus at trial was very much on Trends’ misguided effort to argue what it simply could not prove. The acknowledgement by Trends’ counsel in closing of the fundamental flaws in those arguments re-enforced the Judge’s conclusion. Hence our acceptance of the Judge’s conclusion on that part of the case.
However, we do not think the Judge, in assessing the hopelessness of Trends’ case, considered the significance of the argument Trends made that the public announcement on 17 December 2014 breached the confidentiality terms of the Funding Agreement. In his substantive decision the Judge described that claim in the following terms:[34]
[136] Irrespective of whether Callaghan was entitled to suspend the Funding Agreement on 17 December 2014, Trends alleges that the issue of the Suspension Press Release independently breached the Funding Agreement. Trends took issue, in particular, with the information that the suspension had occurred after an audit of Trends’ funding claims, that there had been an internal investigation followed by an independent audit, and that the matter had been referred to the SFO.
[137] Trends alleges that it is this breach that has been the cause of massive and ongoing loss to Trends. In particular, the evidence of both David Johnson and Andrew Johnson was that the development of Trends’ digital platform had reached a point that Trends was poised to not only realise significant revenue through the operation of the platform in its core area of business, but that there was also considerable potential to market the platform as a package to be utilised by other businesses. Trends’ evidence was that there were at least two investor opportunities being pursued at the time of the suspension decision and that these could not be pursued following the issue of the Suspension Press Release and its implication, with reference to the SFO, that Trends had engaged in fraud.
[34]Substantive judgment, above n 1.
The relevant provision of the Funding Agreement read as follows:
8. CONFIDENTIALITY
8.1 You acknowledge that Callaghan Innovation is required to release information relating to this Agreement, its investment in the Programme, the progress of the Programme, and the benefits to New Zealand from the Programme, from time to time.
8.2 You agree that Callaghan Innovation may release the following information relating to this Agreement, the Programme:
(a) your name and contact details;
(b) the Contract ID;
(c) the title of the Programme;
(d) the fund from which Funding for the Programme is provided;
(e) the relevant sector;
(f) the total amount of Funding paid;
(g) the total amount of Funding payable over the duration of this Agreement;
(h) the year Funding was approved; and
(i) statistics relating to the Programme in aggregated form.
8.3 You acknowledge that Callaghan Innovation may release information relating to this Agreement to its duly appointed agents and advisors, the Ministry of Business, Innovation, and Employment, and New Zealand Trade and Enterprise.
8.4 Except as provided for in clauses 8.2 and 8.3, Callaghan Innovation will not release information relating to this Agreement unless Callaghan Innovation is obliged to release that information under the Official Information Act 1982, the Privacy Act 1993, at law, under any regulation or to provide an answer to any parliamentary questions, meet any parliamentary requirements, or provide information to a Minister.
8.5 Callaghan Innovation will advise you if it receives a request under the Official Information Act 1982 or the Privacy Act 1993 for any information relating to this Agreement, and will consult with you before responding to the request.
Responding to Trends’ claim based on cl 8, Callaghan argued that, although this was not what the clause said, properly interpreted it applied to information confidential to Trends, such as may have been disclosed in the application for the grant and more generally in its dealings with Callaghan. In our view, and correctly, the Judge did not accept that argument. He said it must be the case that information about the suspension or termination of the funding by Callaghan was “‘information relating to this Agreement’, as are any steps that have been taken to get to that point including internal investigations and audit or reviews”.[35]
[35]At [149].
The Judge accepted, however, that the reference to the referral to the Serious Fraud Office was not directly related to the funding obtained by Trends and, accordingly, was not “information relating to this Agreement”. Thus, whilst the reference to the Serious Fraud Office “appeared somewhat gratuitous”, it was nonetheless information Callaghan could be expected to provide as part of the obligation “to all its stakeholders”.[36]
[36]At [150].
Moreover, and to the extent that the information it disclosed had been information relating to the Agreement, the Judge considered Callaghan’s broader statutory obligations were relevant, including to act fairly and transparently to ensure compliance with “the Minister’s Direction”.[37] To explain: in his substantive judgment the Judge had explained how the grant scheme administered by Callaghan had been established by a Minister’s Direction from the Minister of Science and Innovation. Callaghan was required to follow that direction pursuant to s 112 of the Crown Entities Act 2004. That Minister’s Direction required Callaghan to develop key processes for vetting and auditing businesses to ensure claimed research and development was legitimate and to provide claw-back provisions where that was not the case.
[37]At [152].
In addition, the Minister’s Direction defined Eligible R&D Expenditure in the following way:
Eligible R&D expenditure is defined as those meeting the New Zealand Equivalent to International Account Standard 38 (NZ IAS 38) definition of research and development and expensed under that standard.
The NZ IAS 38 definitions of R&D are:
·Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.
·Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use.
Clarifying Principle
If necessary, when seeking to distinguish R&D from non R&D, the further advice provided by the New Zealand Financial Reporting Standard 13 (NZ FRS 13) should be applied:
·R&D is distinguished from non-R&D by the presence or absence of an appreciable element of innovation. If the activity departs from routine and breaks new ground it is normally R&D; if it follows an established pattern it is normally not R&D.[38]
[38]We note the “Clarifying Principle” was not referred to in the Funding Agreement.
The Judge reasoned that Callaghan’s wider obligations under the Callaghan Innovation Act 2012 and the Minister’s Direction provided the context for its obligations under the Funding Agreement. Reflecting that earlier conclusion, made in the context of Callaghan’s claim for breach of contract and of statutory duties and/or implied terms, the Judge reasoned:[39]
In such circumstances, it follows that as cl 8.2 authorised Callaghan to release details of the approval of funding it must also be able to release the corollary of that information, details as to whether the funding has been suspended or terminated and, in broad terms, the reasons for doing so.
[39]Substantive judgment, above n 1, at [152] (footnote omitted).
As the Judge’s reasoning itself shows, it was clearly arguable that Callaghan breached cl 8 when, without any prior notice to Trends other than at the meeting the same day, Callaghan made the statements it did on 17 December 2014. That argument can be based squarely on the terms of cl 8.
Moreover, given the terms of cl 8, Callaghan’s argument that the Minister’s Direction in some way broadened the scope of disclosure allowed by cl 8.4 was not one that was bound to succeed. Clauses 8.2 and 8.3 very specifically described the information Callaghan may release “voluntarily”, as it were. Callaghan also reserved its ability to perform obligations to release information where it was legally required to do so, in response to any Parliamentary questions, to meet any Parliamentary requirements or to provide information to a Minister.
In our view it was therefore arguable that, by reference to the terms of cl 8.4, cl 8 was a code and was not to be construed more widely, for example by reference to information Callaghan could be expected to provide as part of its obligation “to all its stakeholders”. The commercial sensitivity of the information involved here, for example that Callaghan was asking for money back because of concerns as to non‑compliance, is obvious.
Nor do we consider this to be one of those situations where although a part of an appellant’s case is not hopeless, nevertheless the overall case can be said to fall within that category.[40] That is because in our view there was an arguable claim for damages based on breach of cl 8 independent of the hopeless nature of Trends’ efforts to prove it had incurred significant qualifying R&D expenditure.
[40]As noted in Gillibrand (as trustees of the Chris and Mary Gillibrand Family Trust) v Swanepoel [2018] NZHC 1376 at [12].
In our overall assessment, while the amount of $61 million claimed by Trends sounds more than a little farfetched, we do not think it can be concluded that Trends’ claim for the breach of contract based on cl 8 was hopeless. On the basis of that finding, we are not satisfied that Trends’ case overall was hopeless. It follows that the Judge was in error in awarding indemnity costs against Trends.
However, we consider that Trends’ focus on parts of its argument that were hopeless entitles Callaghan to an uplift from standard scale costs. In our view the appropriate figure for that uplift is 50 per cent of standard scale costs. We base that assessment balancing the hopeless aspect of the case Trends’ brought alongside what the Judge acknowledged was the relatively smooth way the proceedings unfolded.
Disbursements
Mr Johnston and The Circle also challenge the Judge’s decision that disbursements totalling $303,823.66 were properly payable to Callaghan.[41]
[41]Costs judgment, above n 3, at [71].
Callaghan originally claimed total disbursements of $434,212.37. Mr Johnson and The Circle disputed the reasonableness of all but $2,067.40 of that amount.[42]
[42]At [53].
The Judge:
(a)approved $22,617.41 of disbursements for litigation support;[43]
(b)reduced reimbursement of expert witness costs from $294,354.06 as originally claimed to $193,599.05, taking a pragmatic approach to the absence of meaningful narration in the expert witnesses’ invoices;[44] and
(c)approved in full a total $21,542.06 for expenses incurred with respect to all but one of the various witnesses of fact, but reducing the reimbursement for that one witness by 30 per cent, to $63,986.02, for the same reason as he reduced the claim for expert witness expenses.[45]
[43]At [57]–[58].
[44]At [66].
[45]At [70].
In taking the approach he did, the Judge first concluded that the expert evidence was necessary. But he acknowledged, the invoices submitted did not provide sufficient information to gauge the reasonableness of the fees charged by any of the experts to Callaghan.
He then reasoned:
[64] In Auckland Waterfront Development Agency Limited v Mobil Oil New Zealand Limited Katz J faced similar circumstances when dealing with disbursements claims totalling over $800,000. Her Honour, noting the need for a structured assessment of reasonableness but lacking the information to carry it out, elected to take a pragmatic approach to ensure that justice was done between the parties and reduced the total expert fees sought by 30 per cent to take account of the potential presence of “inefficiencies, duplication, charge out rates at the high end of industry norms, or unjustified uplifts ...”. Her Honour noted that “indeed a 30 per cent reduction is possibly on the high side” but it was “appropriate to err on the side of caution” as the claiming party carried the burden of proving reasonableness. A similar approach was adopted by Gordon J in Sullivan v Wellsford Properties Ltd where Her Honour awarded 80 per cent of the disbursements sought.
[65] In the current case, in the absence of any meaningful narration on the invoices themselves or explanation by counsel, it is not possible to conclude that the amounts claimed are reasonable for the purposes of requiring Trends to pay those sums. Given this position it is necessary to follow a similar approach to Katz and Gordon JJ noted above in order to take account of the possibility of inefficiencies, duplication, high charge out rates and unjustified uplifts. As a result, I reduce the amount claimed for expert witnesses by 30 per cent in each case.
(Footnotes omitted).
On appeal, Mr Johnson and The Circle argue that, given the Judge recognised the inadequacy of the details for the disbursements that he reduced by 30 per cent, he should not in fact have allowed any recovery for those matters.
Having conducted the trial, the Judge was well placed to take that approach and make the assessment he did. We see no reason to differ from the conclusion he reached.
Result
The appeal is allowed in part.
The High Court’s indemnity costs order is quashed and substituted for an order of standard scale costs uplifted by 50 per cent. We remit the quantification of those costs to the High Court if the parties are unable to agree.
We take the view that neither side has succeeded more than the other in this appeal. Accordingly, we make no order as to costs.
Solicitors:
Hucker & Associates, Auckland for Appellants
Wilson Harle, Auckland for Respondents
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