Water Guard NZ Ltd v Midgen Enterprises Ltd
[2017] NZCA 36
•2 March 2017 at 3.30 pm
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA385/2016 [2017] NZCA 36 |
| BETWEEN | WATER GUARD NZ LIMITED |
| AND | MIDGEN ENTERPRISES LIMITED |
| AND | DAVID JAMES MIDGEN |
| Hearing: | 9 February 2017 |
Court: | Randerson, Harrison and Winkelmann JJ |
Counsel: | M J Fisher and K J Ng for Appellant |
Judgment: | 2 March 2017 at 3.30 pm |
JUDGMENT OF THE COURT
AThe appeal is allowed in part.
B The costs order in favour of the first and second respondents in the High Court is set aside.
CCosts in the High Court are to lie where they fell.
DThe respondents are ordered to pay the appellant costs in this Court for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Harrison J)
Introduction
Water Guard NZ Ltd (WGL) sued Midgen Enterprises Ltd (Midgen) for damages for contractual breaches which it quantified shortly before trial at $511,100. WGL alleged that Midgen had misrepresented sales figures when selling its New Zealand distribution business for water filtration units in 2013 (“the misrepresentation claims”). Additionally or alternatively, WGL alleged that the units were not fit for purpose or of merchantable quality (“the defects claims”).
Asher J dismissed WGL’s misrepresentation claims in a comprehensive judgment delivered in September 2015 after an eight-day trial in the High Court at Auckland.[1] He also dismissed two of WGL’s five defects claims but found Midgen liable on the remaining claims. He was unable to determine damages because WGL’s claim was not satisfactorily apportioned between the three surviving defects claims. He adjourned WGL’s damages claim for trial at a later date. In December 2015 WGL amended its damages claim to $108,000. On the eve of that trial scheduled for July 2016, the parties consented to entry of judgment in WGL’s favour for $67,527.97. Costs were reserved.
[1]Water Guard NZ Ltd v Midgen Enterprises Ltd [2015] NZHC 2227. The total trial lasted for 12 days but incorporated two related claims which were heard together. Of the total hearing time, trial of this proceeding occupied eight days.
In his subsequent costs judgment, Asher J awarded: (1) Midgen costs calculated on a 2B basis but for one counsel for a six-day hearing on the liability trial together with full disbursements (Costs Order (1)); (2) directed that costs incurred subsequent to the liability judgment were to lie where they fell (Costs Order (2)); and (3) declined to award costs on the costs argument (Costs Order (3)).[2]
[2]Water Guard NZ Ltd v Midgen Enterprises Ltd [2016] NZHC 1546.
WGL now appeals against the first two orders on the grounds that costs should lie where they fall under Costs Order 1 but that costs should be awarded in its favour under Costs Order 2.
High Court
In summary, Asher J decided Costs Order (1) on two grounds. First, on an overall perception he was satisfied that WGL was for the most part unsuccessful and Midgen was for the most part successful.[3] WGL failed totally on its misrepresentation claims, which occupied just under four of the eight days of trial, and failed on two defects claims which were substantial and occupied another two days.[4] Thus, about 25 per cent of the trial time was devoted to WGL’s successful claims, with the remaining 75 per cent spent on its unsuccessful claims.[5]
[3]At [10] and [26].
[4]At [11]–[12].
[5]At [27].
Second, the Judge was satisfied that WGL acted unreasonably in rejecting and failing to respond to Midgen’s settlement offers, in particular:
(a)Midgen made Calderbank offers to settle WGL’s claim before the liability trial for $40,000 and $50,000 respectively in June 2014 and February 2015 (the latter was by way of a credit note on stock WGL was contractually bound to purchase).[6] In August 2014 Midgen proposed that WGL’s misrepresentation claims be abandoned immediately and the defects claims be transferred to the District Court.[7]
(b)While the High Court Rules (the Rules) regarding Calderbank costs were not engaged, principally because Midgen’s offers were not close to the value or benefit of the judgment eventually entered, its offers were nevertheless relevant.[8] Midgen had acted reasonably in offering $50,000 at the time when WGL was claiming $511,100 given that over a year later, and after expending substantial costs on its failed misrepresentation claims, WGL settled for $67,527.90; Midgen’s offer was within a proper negotiation range, and indicated good faith and a wish to find a commercially realistic settlement.[9] By contrast WGL ignored Midgen’s offers and made no offers to settle until May 2016, two months before the fixture for the damages trial, for an amount of $261,185.[10]
(c)Within a discretionary assessment, it was relevant to compare Midgen’s reasonable approach to settlement with WGL’s “obduracy”.[11] WGL was at fault in not engaging with the Calderbank offers and the defects claims should have been heard in the District Court.[12] This approach was material in the modern age of litigation where settlement is a positive objective to be encouraged.[13] WGL’s overall approach and treatment of Midgen’s commercially understandable and reasonable conduct weighed against it.[14]
[6]At [13]–[14].
[7]At [13].
[8]At [15] and [19] applying r 14.11 of the High Court Rules.
[9]At [19].
[10]At [16].
[11]At [20].
[12]At [27].
[13]At [20].
[14]At [28].
In the result the Judge found Midgen was entitled to costs calculated on a 2B basis for the 75 per cent of the trial where it was successful but only for one counsel to take into account its failure on the three proven defects claims. While Midgen was unsuccessful on the remaining 25 per cent, no costs were awarded in WGL’s favour because of its unreasonable conduct.[15]
[15]At [29].
In making Costs Order (2), Asher J was satisfied costs should lie where they fall on the damages claim because the consent judgment sum of $67,527 was much below WGL’s original claim for $511,100, amended downwards following the liability judgment to $295,806.20 and a few months later to $108,415.36.[16] If WGL had engaged more reasonably with Midgen, a settlement could have been reached promptly thereby limiting wasted costs.[17] In this respect, the Judge took into account the same finding of WGL’s unreasonable conduct, which was one of the two primary grounds for Costs Order (1).
[16]At [31]–[32].
[17]At [31].
The Judge declined to make Costs Order (3) for the reason that each side had enjoyed a measure of success on the costs argument.[18]
Decision
[18]At [37].
In the High Court Mr Fisher for WGL had submitted that trial costs should lie where they fell because both sides had enjoyed a measure of success but that WGL should be awarded costs on a 2B basis for steps taken subsequently towards the damages trial; Mr Grove for Midgen not only submitted that it should have costs but sought an indemnity or an increased award. Mr Fisher developed the same submission before us in support of WGL’s appeal.
Before addressing Mr Fisher’s argument, we record that we are approaching WGL’s appeal on the basis that an appellate court should not interfere unless, in accordance with settled principles, it is satisfied that in exercising his statutory discretion[19] the Judge acted on a wrong principle, failed to take into account some relevant factor, took into account an irrelevant factor, or was plainly wrong.[20]
Costs Order (1)
[19]High Court Rules, r 14(1).
[20]Shirley v Wairarapa District Health Board [2006] NZSC 63, [2006] 3 NZLR 523 at [15].
In this case we accept Mr Fisher’s submission that the Judge erred in making Costs Order (1). We are satisfied that he failed to give sufficient weight to WGL’s ultimate success on and subsequent to the liability trial, both in establishing Midgen’s breach of contract and liability for damages. Mr Fisher is correct that the discretion vested by r 14.1 of the Rules must be exercised subject to the general principles specified in r 14.2.[21]
[21]Glaister v Amalgamated Dairies Ltd [2004] 2 NZLR 606 (CA) at [19] applying Body Corporate 97010 v Auckland City Council (2001) 15 PRNZ 372 (CA) and Mansfield Drycleaners Ltd v Quinny’s Drycleaning (Dentice Drycleaning Upper Hutt) Ltd (2002) 16 PRNZ 662 (CA).
The first of those general principles is that the party which fails should pay the costs of the successful party, formalising the paramount rule that costs should follow the event.[22] WGL’s success on its defects claims was affirmed by Midgen’s later consent to judgment being entered against it for $67,527.97. We agree that Midgen qualified as the unsuccessful party — that is, the party which was adjudged liable to pay money to the other[23] — and that accordingly WGL was the successful party. We disagree with the Judge that WGL lost that status because it failed on most of its claims which in turn occupied most of the trial. That factor can be properly recognised in other ways, such as reducing costs otherwise payable or ordering costs to lie where they fall. However, the final result must ordinarily be given primary weight when exercising the r 14.1 discretion.
[22]Glaister v Amalgamated Dairies Ltd, above at n 21, at [9].
[23]A L Barnes Ltd v Time Talk (UK) Ltd [2003] EWCA Civ 402, [2003] All ER (D) 391 at [28].
We accept, however, that it was open to the Judge to sever off the 25 per cent of WGL’s claim, on which he found it was successful, and displace its entitlement by its unreasonable approach to settlement.
This approach reflects Mr Fisher’s proper acceptance that no costs order should be made in favour of either party if Costs Order (1) is set aside. Costs should lie where they fall.
Costs Order (2)
Mr Fisher submits that Asher J erred by not awarding costs in WGL’s favour on the subsequent events leading up to the damages judgment. He says the Judge erred in finding that on 25 May 2016 WGL offered to settle the defects claim for $261,185, whereas the offer was in fact made for $150,000 including costs and disbursements of $88,000; and in taking into account Midgen’s proposal in August 2014 that the misrepresentation claims be abandoned and the defects claims transferred to the District Court. He also submits that the Judge was wrong to infer that settlement could have been reached more promptly if WGL had engaged more reasonably with Midgen, especially as Midgen’s open offer of $50,000 was not made until the day before the damages trial was scheduled to start; and that, in response, WGL offered to accept $67,527.97, representing full compensation for the costs incurred to that date in remedying the product defects and effectively abandoning its claim for future costs.
We do not accept Mr Fisher’s submission. It was open to the Judge to find that, on this aspect of the proceedings, costs should lie where they fall. WGL’s success was not decisive. It was open to the Judge to find that WGL’s approach following trial, in failing to recognise the realistic parameters of its recoverable loss, was an obstacle to a reasonable settlement. A detailed dissection of the dates and the parties’ particular acts or omissions is not required. WGL persisted with its excessive claim of $511,100 for three months after the liability judgment. The Judge was entitled to find that WGL’s conduct was obdurate and stood firmly in the way of a commercially sound compromise.
Conclusion
When viewed in the round, allowing the burden of costs to lie where they fall in what was fruitless and uneconomic litigation accords with the overall justice of the case. WGL had a legitimate complaint about defects in product supplied by Midgen. However, the company did not finally come to terms with the reality of its legal entitlement until a late stage in the litigation process, well after the liability judgment. By then both parties had expended large sums on litigation costs.
Midgen, too, failed to realistically evaluate its risks on the defects claim at a reasonable stage and instead defended the claim in its entirety. It now says it acknowledged at an early stage that there were defects in its products. But if it had taken prompt and effective steps, it would likely have assessed its liability at the modest sum for which it ultimately consented to judgment.
Result
The appeal is allowed in part. The costs order in favour of the first and second respondents in the High Court is set aside. Costs in that Court are to lie where they fall in all respects.
The respondents are ordered to pay WGL’s costs for a standard appeal on a band A basis together with usual disbursements.
Solicitors:
Castle/Brown, Auckland for Appellant
Dawsons, Auckland for Respondents
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