Tudhope v McEwan (2003) Limited

[2010] NZCA 166

IN THE COURT OF APPEAL OF NEW ZEALAND

CA416/2009
[2010] NZCA 166

BETWEENSHARP TUDHOPE

Appellant

ANDMCEWAN (2003) LIMITED

Respondent

Hearing:20 April 2010

Court:Ellen France, Gendall and Cooper JJ

Counsel:F B Barton for Appellant

J M Holmes for Respondent

Judgment:5 May 2010 at 10.30 am 

JUDGMENT OF THE COURT

AThe appeal is allowed and the question of costs in the High Court is remitted back to that Court.

BNo order for costs in this Court.

REASONS OF THE COURT

(Given by Ellen France J)

Introduction

[1]        The respondent, McEwan (2003) Ltd (McEwan), was buying a motel business from another company, Donnelly Holdings Ltd (Donnelly).  When issues arose about the viability of the business, McEwan and Donnelly went to mediation.  They reached an agreement, part of which involved Donnelly’s directors guaranteeing settlement.  The appellant, Sharp Tudhope, a firm of solicitors, advised McEwan in relation to the settlement agreement. 

[2]        Donnelly did not perform its part of the bargain and the directors of Donnelly disputed that they had any personal obligations to complete settlement.  McEwan initially brought proceedings against the directors.  However, those proceedings came to an end and McEwan brought proceedings claiming $417,000 in damages against Sharp Tudhope for negligence in relation to the settlement agreement. 

[3]        McEwan’s claim against Sharp Tudhope went to trial.  Heath J determined that Sharp Tudhope had acted negligently in not ensuring that enforceable guarantees were given as part of the settlement.  Judgment in the sum of $100,000 was entered in favour of McEwan together with interest at the applicable rates under the Judicature Act 1908 from the date of issue of the proceeding to the date of judgment.  Heath J also awarded costs in favour of McEwan on a 2B basis together with disbursements.[1]

[1]      McEwan (2003) Ltd v  Sharp Tudhope HC Tauranga CIV-2007-470-654, 15 June 2009.

[4]        Sharp Tudhope now appeals against the order for costs.  Its appeal is based on a “without prejudice except as to costs” offer to settle the proceedings for “$100,000 all up” which they made some five months before trial (the Calderbank letter).  When Heath J made the order for costs against Sharp Tudhope as part of his judgment determining the claim he was not aware of the Calderbank letter. 

The parties’ contentions

[5]        On appeal, Sharp Tudhope say costs incurred after the date of the Calderbank letter (25 November 2008) should be awarded to them.  Those costs are in the order of $20,000.  Mr Barton for Sharp Tudhope says the settlement offer was a factor relevant to the costs award in terms of r 48GA of the High Court Rules which then applied. 

[6]        McEwan’s response is that in all the circumstances the Judge’s award of costs was appropriate.  McEwan argues that r 48GA is not applicable because the rule only applies when the settlement offer exceeds the amount of the judgment obtained.  Mr Holmes for McEwan submits that when interest and costs are taken into account the “all up” offer of $100,000 was less than the judgment obtained.

The relevant rules

[7]        The parties’ submissions focus on r 48GA of the High Court Rules 1985, which were the Rules applicable to this case.  Rule 48GA makes it plain that the effect on the question of costs of a settlement offer made in terms of r 48G is in the Court’s discretion. The rule also relevantly provides that:

(3)Subclauses (4) and (5) apply to an offer made under rule 48G by a party to a proceeding (party A) to another party to the proceeding (party B).

(4)         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, – the principle to be applied in determining costs is that party A is entitled to costs on the steps taken in the proceeding after the offer is made.

(5)If an offer made by party A does not fall within paragraph (a) or paragraph (b) of subclause (4), but is close to the value or benefit of the judgment obtained by party B, the principle to be applied in determining costs is that the offer may [...] be taken into account.

[8]        Reference should also be made to r 48D.  Rule 48D made provision for costs to be refused or reduced where one party “contributed unnecessarily” to the time or expense of the proceeding or a step in it by “[f]ailing, without reasonable justification, to accept an offer of settlement ...”.

Discussion

[9]        We agree with Mr Holmes that r 48GA(4) does not apply.  That is because the sum offered ($100,000 “all up”) does not exceed the amount of the judgment.  Mr Barton accepted that the interest awarded on the judgment sum is relevant to the calculation in terms of r 48GA.  That concession is consistent with a number of decisions in which interest has been treated by the High Court as part of the judgment in determining the application of the costs rules.[2] 

[2]McDonald v FAI (NZ) General Insurance Co Ltd (2002) 16 PRNZ 298 (HC); Dick v Lee HC Dunedin CIV-2004-412-310, 1 August 2006; Gilbert v Shanahan HC Wellington CP503/93, 29 September 1997; and Sanson v Parval Marketing Ltd HC Auckland CIV-2006-404-7231, 7 July 2008.

[10]       The interest amounts to either approximately $11,000 if assessed in November 2008 at the date of the Calderbank letter, or some $15,000 if assessed in June 2009, the date of judgment.  When interest is taken into account, the terms of r 48GA(4) are not met.  Whether the offer is “close to the value of the judgment” so that r 48GA(5) applies is a more finely balanced question.   However, we do not need to determine that issue because the offer could, in any event,  have been treated as a relevant consideration in terms of r 48D.   

[11]       There is force in Mr Barton’s submission that the offer was relevant under r 48D given the size of the gap between what McEwan sought ($417,000) and what they obtained ($100,000 plus interest). 

[12]       Heath J’s approach to assessing damages also supports the view that the settlement offer was very realistic.  The Judge observed that the evidence of McEwan on loss was “sparse”.[3]  Heath J also said that:[4]

There seemed to be an underlying assumption [by McEwan] that, if guarantees had been executed and enforced, all losses would have been recovered.  I do not think that follows from the evidence.

[3] At [78].

[4] At [78].

[13]       Accordingly, the Judge took the view that all that could be done was a “broad brush appraisal” of the amount that might have been recovered.[5]  The Judge took what he said was a “conservative estimate” of what might have been recovered, namely, $100,000.[6] 

[5] At [79].

[6] At [80].

[14]       Further, as Mr Barton says, there are good policy reasons for taking such an offer into account in the context of costs.  This Court in Moore v McNabb[7] identified both public and private interests underlying r 48GA and referred to the “requirement of fairness” that litigants have:[8]

... some economic means of limiting their exposure to the risk of costs; and secondly the Court itself must ensure that a procedure of this character operates as an effective encouragement to settle.

[7]      Moore v McNabb (2005) 18 PRNZ 127 (CA).

[8] At [58].

[15]       The Calderbank letter was therefore potentially relevant to costs and should have been considered, as no doubt it would have been if the Judge had been told about it before making the costs award.

[16]       These matters are of course discretionary and we are not in a position to assess whether the Calderbank letter would ultimately have altered matters.  The High Court Judge is best placed to consider that.  For these reasons, the appeal is allowed and the matter is remitted back to the High Court for reconsideration of the question of costs in that Court in light of the Calderbank letter.

[17]       We make no order for costs in this Court.  The fact that a settlement offer has been made must not be communicated to the Court until the question of costs is to be decided.[9]  However as the authors of McGechan note in their commentary on the current rule (r 14.10), a party must inform the Court of a settlement offer when the Court fixes costs if it wishes the offer to be taken into account.[10]  The authors of McGechan continue:[11]

... if a [r 48G] offer has been made but refused, the party that made the offer should make it clear to the Court that it wishes to be heard about costs before they are fixed.

[9]      High Court Rules 1985, r 48G(2).

[10]      AC Beck and others McGechan on Procedure (looseleaf ed, Brookers) at [14.10](5).

[11]      At [14.10](5)(b).

[18]       That did not occur in this case.  Accordingly, although the appellant has succeeded in this Court the fairest approach to costs in this Court is that each party should bear its own costs.

Solicitors:

Anderson Lloyd, Dunedin for Appellant

Sanderson Weir, Auckland for Respondent