West End Property Developments Limited v Prescott

[2022] NZHC 1900

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE

CIV-2020-419-000253

[2022] NZHC 1900

BETWEEN

WEST END PROPERTY DEVELOPMENTS LIMITED

Plaintiff

AND

RYAN PRESCOTT and PAUL PRESCOTT

Defendants

Hearing:	On the papers
Counsel:	A R Gilchrist for Plaintiff K I Bond for Defendant
Judgment:	3 August 2022

JUDGMENT OF ASSOCIATE JUDGE P J ANDREW

[Costs]

This judgment was delivered by Associate Judge Andrew on 3 August 2022 at 1.30 pm

pursuant to r 11.5 of the High Court Rules Registrar / Deputy Registrar

Date …………………………

WEST END PROPERTY DEVELOPMENTS LTD v PRESCOTT [2022] NZHC 1900 [3 August 2022]

Introduction

[1]    In my judgment of 24 March 2022,1 I granted the defendants’ application for summary judgment. I concluded that the two causes of action, namely breach of contract and estoppel, were incapable of success.

[2]The parties have been unable to agree on costs. This is my judgment on costs.

[3]The defendants, the successful party, seek costs as follows:

(a)2B costs for all steps prior to 3 September 2021 ($19,598) (i.e. prior to a Calderbank offer) plus a 25 per cent uplift on those costs ($4,899.50) and indemnity costs thereafter of $39,805.08, for a total of $64,302.58 plus disbursements;

(b)Alternatively, 2B costs for all steps prior to 3 September 2021 ($19,598) plus a 25 per cent uplift ($4,899.50) and 2B costs for steps after 3 September 2021 ($8,126) plus a 50 per cent uplift ($4,063), for a total of $36,686.50 plus disbursements.

[4]    The defendants have also brought  a  non-party  costs  application  against  Mr Russell Mead, the director of the plaintiff company.2 The application is based on correspondence received from counsel for the plaintiff, written in the context of seeking to resolve the issue of costs. Mr Mead says that that correspondence is subject to settlement negotiation privilege (i.e. without prejudice correspondence) and is therefore inadmissible under s 57 of the Evidence Act 2006. Mr Mead says that there is no basis for the non-party costs award against him.

[5]    West End’s position is that there should be a single costs award against it on a 2B basis and in the sum of $27,724.00 plus disbursements.

[6]The critical issues I must determine are as follows:

1      West End Property Developments Ltd v Prescott [2022] NZHC 560.

2      West End.

(a)Should there be an increase in costs above the 2B scale on the basis of the Calderbank offer and, if so, what is the appropriate calculation?

(b)Is the letter from counsel for the plaintiff of 6 April 2022 the subject of settlement negotiation privilege under s 57 of the Evidence Act 2006 and therefore inadmissible?

(c)Are the grounds  made  out  for  a  non-party  costs  award  against  Mr Mead?

Background facts

[7]    In 2019 and 2020, solicitors for the parties exchanged correspondence with a view to trying to resolve the dispute. That was prior to the plaintiffs issuing the proceedings. In their letter of 20 December 2019, the solicitors for the plaintiff contended that a binding  agreement  had  been  reached  between  the  parties  by  20 October 2014.

[8]    Subsequent to the filing of the proceedings, the solicitors for the defendants wrote on a “without prejudice save as to costs” basis to the plaintiff’s solicitors by letter dated 3 September 2021.3 The defendants offered on a “strictly commercial basis” to settle the proceedings by payment of $50,000 in full and final settlement of all outstanding matters between the parties. The offer remained open for seven days, namely until Friday 10 September 2021. The letter also stated that if the offer were not accepted, an application for strike out/defendants’ summary judgment would be made.

[9]    By letter dated 10 September 2021, the solicitors for the plaintiffs rejected the offer and advised that they had instructions to defend any strike out/summary judgment application.

3      The Calderbank letter.

[10]   Subsequent to my judgment of 24 March 2022, the solicitors for the parties exchanged further correspondence in an attempt to reach agreement on the question of costs.

[11]   By letter dated 6 April 2022, the solicitors for the defendants wrote to the solicitors for the plaintiff proposing that the defendants would agree not to pursue indemnity costs on the basis that they now seek if West End agreed to the alternative proposal of a 50 per cent uplift on scale subsequent to the Calderbank offer (i.e. a total sum of $36,686.50 plus disbursements).

[12]   Counsel for West End responded by letter dated 6 April 2022. It is the admissibility of that letter that is at issue. In that letter it is stated that West End has no assets and “has remained solvent as a result of advances made by Mr Mead personally, in order to fund these proceedings”. The letter further states:

If you clients seek more than the $10,000 held in trust, then your clients should file their memorandum and affidavit evidence. The company [West End] will be unable to pay any sum beyond $10,000 and there is a risk that, if the company is wound up, then any payment received by your clients may be disgorged as a preferential payment.

Relevant legal principles

[13]   In accordance with r 14.1 of the High Court Rules 2016, costs are at the discretion of the Court. The discretion is to be applied consistently and predictably in accordance with the principles set out at r 14.2.

[14]   Rule 14.6 provides for increased costs and indemnity costs. Increased costs may be ordered where there is a failure by the paying party to act reasonably.4

[15]   The Court needs to consider the extent to which the failure to act reasonably contributed to the time or expense of the proceedings. Only to that extent can any percentage uplift from scale be justified.5

4      Bradbury v Westpac Banking Corporation [2009] NZCA 234, [2009] 3 NZLR 400 at [27].

5      Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2010] NZCA 400, (2010) 24 NZTC 24,500 at [165].

[16]   Where, in terms of r 14.6(3)(b)(ii), an argument lacked merit and was inherently unlikely to succeed, the increased costs apply to all steps.6

Analysis and decision

Issue (a) – Should there be an increase in costs beyond the 2B scale?

[17]   I agree with the submission of the defendants that the proceedings as filed were confusing, contradictory and changed significantly over time. The filing of further particulars did not clarify matters and the amended statement of claim relied on the Vosper Law letter of 25 September 2014, a pleading that was never capable of success.7

[18]   In my substantive judgment of 24 March 2022, I noted that West End’s claim for breach of contract was an evolving one.8

[19]   Following the application for summary judgment and the Calderbank letter of 3 September 2021, West End changed its position again and purported to disavow the 25 September 2014 letter entirely.

[20]   The Calderbank letter clearly pointed out the basis on which the claim could not succeed. I accept the defendants’ submission that the settlement offer made was, in the circumstances, “an extremely generous offer”.

[21]   I find that the rejection of that offer and the decision to continue with the proceedings after that point was a clear failure by West End to act reasonably. I accept that the Calderbank offer was only open for a limited one-week window. However, that was ample time to consider matters and, in any event, there is no evidence of any further attempt by the plaintiffs to reach a compromise. All parties would obviously have benefited from an early settlement.

6      NR v MR [2014] NZCA 623, (2014) 22 PRNZ 636; Broadspectrum (New Zealand) Ltd v Nathan

[2017] NZCA 434 at 57.

7      See West End Property Developments Ltd v Prescott, above n 1, at [14].

8      West End Property Developments Ltd v Prescott, above n 1, at [27].

[22]   I reject the defendants’ contention that this case falls into the “hopeless” category so as to warrant indemnity costs. Indemnity costs are awarded where a party has behaved either badly or very unreasonably.9 This high threshold has not been made out. I do, nevertheless, accept and find that the reasonableness threshold for an award of increased costs has been made out.

[23]   I find that, as the defendants propose (on an alternative basis), there should be an award of costs on a 2B basis plus a 25 per cent uplift for all steps prior to             3 September 2021, and then 2B costs after that date together with a 50 per cent uplift. A 50 per cent uplift is appropriate given the unreasonable failure to accept an offer of settlement (r 14.6(3)(b)(v)) and the subsequent pursuit of a meritless argument.

Issue (b) – The admissibility of the 6 April 2022 letter

[24]Section 57(1) of the Evidence Act 2006 reads:

Privilege for settlement negotiations, mediation, or plea discussions

(1) A person who is a party to, or a mediator in, a dispute of a kind for  which relief may be given in a civil proceeding has a privilege in respect of any communication between that person and any other person who is a party to the dispute if the communication –

(a)was intended to be confidential; and

(b)was made in connection with an attempt to settle or mediate the dispute between the persons.

[25]   Under s 57(3)(d), this section does not apply if the court considers that, in the interests of justice, the need for the communication or document to be disclosed in the proceeding outweighs the need for the privilege.

[26]   It is not in dispute that the 6 April 2022 letter was made in connection with an attempt to settle the dispute about costs. Section 57(1)(b) is therefore made out. However, whether the letter was intended to be confidential is at issue (s 57(1)(a)).

[27]   The letter of 6 April 2022 is not headed up “without prejudice”. Likewise, the letter to which it responded, namely the letter from the defendants’ solicitors of the

9      Bradbury v Westpac Banking Corporation, above n 4, at [27]–[28].

same date, contained no such appellation. I accept, however, the application of the “without prejudice” rule is not dependent on the use of the phrase “without prejudice”.10 The question of whether communications are protected as being “without prejudice” depends on the intention of the parties which may be inferred where not expressly stated.11

[28]   When determining the extent and existence of the privilege, the Court takes an objective view of what formed part of the settlement negotiations or was reasonably incidental thereto.12

[29]   In Minister of Education v Reidy McKenzie Ltd,13 Faire J held that where documents are not marked “without prejudice” the parties’ intention that they be treated as such can be inferred only in clear cases.14

[30]   It is important to focus on the context in which the 6 April letter was written. By this stage the Calderbank offer was clearly admissible. My judgment had been issued and the only remaining issue was costs. The letter from the defendants’ solicitors did not contain any reference to “without prejudice”. In my view, this was clearly deliberate. As a matter of objective interpretation, the defendants were intending to make an open offer which they could put before me in the event that it was not accepted. The fact that both letters refer to an “offer” is not decisive. The issue is one of objective interpretation. This is not a case where there was an initial “without prejudice” letter and therefore a case where privilege will usually attach to subsequent correspondence.15

[31]   I agree with the submission of the defendants that the parties were legally advised and the concept of without prejudice correspondence would have been at the forefront of their minds at the time of this correspondence. The subject matter was of course the defendants’ previous “without prejudice save as to costs” letter and its

10     Westgate Transport Ltd v Methanex New Zealand Ltd (2000) 14 PRNZ 81 at [20(b)].

11     Westgate Transport Ltd v Methanex New Zealand Ltd, above n 10 at [20(b)] and [20(c)].

12     Westgate Transport Ltd v Methanex New Zealand Ltd, above n 10, at [20(e)].

13     Minister of Education v Reidy McKenzie Ltd [2015] NZHC 1555 at [40].

14     His Honour referred to the decision O’Brien v The New Zealand Home Loan Company Ltd HC Auckland CIV-2010-404-008323, 22 July 2011, at [29].

15     Westgate Transport Ltd v Methanex New Zealand Ltd, above n 10, at [20(c)].

impact on costs. While the appellation “without prejudice” is not essential in claiming privilege, its omission in this case is a significant factor.

[32]   I find that this case is different from Minister of Education v Reidy McKenzie Ltd, at [29] above, where the correspondence at issue commenced on a clearly “without prejudice” basis. In Minister of Education v Reidy McKenzie Ltd, the financial statements in question were provided in response to a request made in a letter marked “without prejudice”. Here, the first letter in the chain was open and, as noted, deliberately so. As a matter of objective interpretation, I find that the disputed 6 April 2022 letter should also be treated as an open letter.

[33]   Even if I am wrong in that conclusion, I would find that the exception in       s 57(3)(d) applies. The disputed letter should be admitted because, in the interests of justice, the need for disclosure outweighs the need for the privilege.

[34]   The 6 April 2022 letter contains some important and very clear statements. They are inconsistent with Mr Mead’s current evidence as to the solvency of the plaintiff company and that inconsistency has not been satisfactorily explained. If I was unable to take into account these inconsistencies, I would have been misled. This case is similar to Forestry Corporation of New Zealand Ltd v Attorney-General,16 where a party was claiming not to have been consulted in the settlement process and the Court admitted without prejudice material to prove that it had been.

[35]   The letter of 6 April 2022, written on Mr Mead’s instructions (it says as much) states that West End:

(a)Has no assets;

(b)Only remained solvent because Mr Mead advanced money to it in order to pursue these proceedings;

(c)Was set up for the now complete property development at issue; and

16     Forestry Corporation of New Zealand Ltd v Attorney-General HC Wellington CIV-2002-485-196, 20 October 2003, at [52].

(d)Therefore, has no prospect of paying any costs beyond the $10,000 held in trust and any payment of costs would be at risk of being clawed back by a liquidator as an insolvent transaction.

[36]   Inconsistently with those clear statements, Mr Mead in his affidavit of 28 June 2022 makes the bare assertion that the plaintiff “still trades and is not insolvent”.

[37]   I accept that Mr Mead has attached to his affidavit the company’s most recent financial statements. However, those statements do not demonstrate in any way that the company is solvent. Notably, those financial statements are:

(a)More than three years old;

(b)Suggest that the company was insolvent at the time and that it had negative equity of $358,226; and

(c)Suggest that West End was not trading and that it had no trading income for the year ended 2019.

[38]   Mr Mead has not explained the accounts and it is not clear what, if any, assets West End now holds or what trading income it is or has been receiving and for what activity.

[39]   I note that Mr Mead seeks leave to file a further affidavit with “updated accounts”. However, he does not say what time period those accounts will cover. I decline to grant such leave; to do so would be an unjustified indulgence in circumstances where it was incumbent on Mr Mead to provide a full, clear and consistent explanation for the conflicting positions presented.

[40]   I further noted that the most recent accounts for West End are now more than three years old. That again raises the question of whether West End is in fact trading and suggests that it was used solely as a vehicle for these proceedings.

[41]   I find that the letter of 6 April 2022 is admissible. The without prejudice privilege in s 57 of the Evidence Act 2006 does not apply. Alternatively, the letter is admitted in evidence under the exception in s 57(3)(d).

Issue (c) – The non-party costs application

[42]   The broad discretion under r 14.1 allows for costs orders in favour of non- parties.17

[43]   The general principles were set out by the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2):18

(a)A costs order against a non-party should be made only in exceptional circumstances.19

(b)As a general rule, a costs order will not be made against “pure funders” of litigation.20

(c)Liability for costs will attach to non-parties who not only fund a proceeding but substantially control it. In those circumstances, the non-party is the “real party to the litigation”.21

(d)A potential exception to the above principle is where the non- party is a director or can realistically be regarded as acting in the interests of the company, particularly its shareholders and creditors, rather than his or her own interests.22

(e)In such cases there needs to be “something additional” before non-party costs will be ordered, and that “something additional” could include:

(i)The fresh injection of capital for the known purpose of funding litigation.23

(ii)Impropriety or bad faith or the pursuit of speculative claims.24

[44]   More recently in Kidd v Equity Realty (1995) Ltd, the Court of Appeal held that:25

(a)Where a company litigant was insolvent at the time of litigation, a court may well be easily persuaded that the directors were

17     Erwood v Maxted [2010] NZCA 93, (2010) 20 PRNZ 466 at [18].

18     Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2004] UKPC 39, [2005] 1 NZLR 145.

19     Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2), above n 18, at [25(1)].

20     Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2), above n 18, at [25(2)].

21     Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2), above n 18, at [25(3)].

22     Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2), above n 18, at [29].

23     Arklow Investments Ltd v MacLean HC Auckland, CP49/97, 19 May 2000 at [20]; referred to with approval in Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2), above n 18, at [26].

24     Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2), above n 18, at [33].

25     Kidd v Equity Realty (1995) Ltd [2010] NZCA 452 at [20].

acting for their own purposes, were “the real parties” and therefore should pay costs; and

(b)If, expressly or by implication, the directors have taken a “heads I win, tails you lose” approach, including cases where a claim is speculative and/or devoid of merit, a similar conclusion is likely to be reached.

[45]   It is clear from the letter of 6 April 2022 that Mr Mead was funding the proceedings and substantially controlled them. In the circumstances, he is the “real party to the litigation”.

[46]   I further find that in this case there is an element of “something additional” which justifies the making of a non-party costs order against Mr Mead. The relevant factors are:

(a)The letter from West End’s counsel of 6 April 2022 that expressly states that West End has no assets and only remained solvent as a result of advances from Mr Mead which were made for the express purpose of funding these proceedings; and

(b)Mr Mead has used West End as a vehicle to advance a speculative claim for more than $800,000 in damages. I found that that claim was incapable of success.

[47]   The fundamental deficiencies in West End’s claims were pointed out in the Calderbank letter of 3 September 2021. However, as noted, Mr Mead rejected the generous offer and pursued the litigation despite these deficiencies. Mr Mead caused West End to prosecute the proceedings knowing that West End was insolvent and would not be able to pay costs in the likely event that its claim failed.

[48]   It is clear from Mr Mead’s affidavit of 28 June 2022, that West End was set up solely for the development of the subject property for the Prescotts and subsequently for Ebbett Toyota. Notably, West End sold the subject property, with settlement in January 2018. These proceedings were not brought until October 2020, nearly three years later. As I noted in my substantive judgment, that delay has never adequately been explained.

[49]   In these circumstances, I infer that the sole remaining purpose of West End was as a vehicle for Mr Mead to pursue the proceedings. Logically, the ultimate beneficiary of the proceedings would have been the shareholders, being Mr Mead and his family trust. But when the claim failed, West End explicitly stated that there was little point in the defendants pursuing costs because West End had nothing anyway. I find that this is in substance a “heads I win, tails you lose” approach.26

[50]   In Tyrion Holdings Ltd v Infrastructure NZ Ltd,27 Associate Judge Smith found that similar circumstances were sufficient to constitute the “something additional” factor necessary to justify a non-party costs order against a director:

The non-parties acknowledge that they injected money into INZ following the acquisition of their shares, and the only purpose for them doing that was to pursue the claim against the defendant. The litigation would not have proceeded without that funding, and the causation requirement of Dymocks is therefore satisfied. INZ was not then carrying on any business, and it has apparently not done so since 2008. It apparently had no remaining creditors to pay and no goodwill or ongoing business undertaking to protect. Its only activity since 2008 appears to have been the commencement and prosecution of the claim against the defendants. In those circumstances, the non-parties could only have been acting in their own personal interests when they acquired their shares and funded the litigation.

[51]   I accept that this case is not on “all fours” with Tyrion. However, there is a significant commonality of factors supporting a finding here that the “something additional” factor has been made out. The fact that, in Tyrion, the non-parties injected money into the company following the acquisition of their shares (not a factor here) is not a basis for saying that in this case the necessary element of causation has not been made out. It appears that in Tyrion the non-parties made very clear and unambiguous acknowledgments about their injection of money into the company and their reasons for doing so. Here, it is equally clear from the letter of 6 April 2022 and the financial statements provided that Mr Mead had the same motivation.

[52]   It may be that Mr Mead was not acting in bad faith as such and that he did obtain legal advice as to the merits or otherwise of the proceedings. The proceedings were nevertheless speculative; the clear deficiencies in West End’s claim were pointed

26     Kidd v Equity Realty (1995) Ltd, above n 255, at [20].

27     Tyrion Holdings Ltd v Infrastructure NZ Ltd [2019] NZHC 2864 at [80].

out in the Calderbank letter and presented an insurmountable obstacle to West End’s success.

[53]   The ultimate question is whether in all the circumstances it is just to make the order. This is, to some extent, a fact-specific jurisdiction.28 I find that in all the circumstances here, it is just to make a non-party costs order against Mr Mead. I find that he should be jointly and severally liable for costs together with the plaintiff company.

Result

[54]I make the following orders:

(a)The plaintiff, West End, is to pay costs to the defendants on a 2B basis for all steps prior to 3 September 2021 plus a 25 per cent uplift, and 2B costs for steps after 3 September 2021 plus a 50 per cent uplift, for a total of $36,686.50 plus disbursements;29

(b)The non-party, Mr Mead, is to pay costs to the defendants on the same basis as set out in (a) above;

(c)The plaintiff, West End, and the non-party, Mr Mead, are jointly and severally liable for costs;

(d)The $10,000 held in the trust account of Vosper Law as security for costs and pursuant to an undertaking not to pay out is to be paid to a bank account to be specified by the defendants in partial satisfaction of the above costs award;

(e)There is no order for costs in relation to the non-party costs application.

Associate Judge P J Andrew

28     Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2), above n 18, at [25(1)].

29     I find that the LawFlow discovery fees are recoverable as a disbursement: Bates v Auckland Council [2022] NZHC 336.