AIR NEW ZEALAND LTD v NEWFOUNDWORLD SITE 2 (HOTEL) LTD [2017] NZHC 2016

AIR NEW ZEALAND LTD v NEWFOUNDWORLD SITE 2 (HOTEL) LTD [2017] NZHC 2016 [22 August 2017]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2016-404-000516[2017] NZHC 2016BETWEEN AIR NEW ZEALAND LIMITEDPlaintiffAND NEWFOUNDWORLD SITE 2 (HOTEL)LIMITEDDefendantHearing: On the papersJudgment: 22 August 2017JUDGMENT OF WYLIE J[COSTS]This judgment was delivered by Justice WylieOn 22 August 2017 at 4.00pmPursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarDate:Solicitors/counsel:Tompkins Wake/N S Gedye QC, AucklandSimpson Grierson, AucklandIntroduction[1] I refer to my substantive judgment dated 29 May 2017.1 I gave judgment in favour of the plaintiff – Air New Zealand Limited – and held that, as the successful party, it was entitled to its costs and disbursements.[2] The parties have been unable to reach an agreement on the amount payable. Memoranda have been filed.[3] Air NZ considers that it has a contractual entitlement to indemnity costs pursuant to clause 11.2 of the agreement between the parties entered into in May/June 2013. In the alternative, it seeks costs on a 2B basis, increased by 50 per cent on the ground that the defendant – Newfoundworld Site 2 (Hotel) Ltd – failed, without reasonable justification, to accept a settlement offer.[4] Newfoundworld contends that Air NZ's legal costs are excluded by clause 11.2 because they are consequential or indirect, and that, in the absence of a contractual entitlement to indemnity costs, Air NZ is entitled to costs on a 2B basis only. It denies that its refusal to accept the settlement proposed was without reasonable justification.Indemnity costs[5] In principle, there is no objection to one party contractually binding itself topay the other's full solicitor-client costs, and the Court can order a party to pay indemnity costs if the party claiming costs is entitled to costs on that basis under a contract or deed.2 In such cases, the Court must decide what tasks, for which costs are claimed, attract the indemnity on a proper construction of the contract between the parties. It must also consider whether the rate at which the tasks have been charged is reasonable, having regard to the principles normally applicable to solicitor-client costs.31 Air New Zealand Ltd v Newfoundworld Site 2 (Hotel) Ltd [2017] NZHC 1131.2 High Court Rules 2016, r 14.6(4)(e); ANZ Banking Group (NZ) Ltd v Gibson [1986] 1 NZLR 556 (CA) at 566.3 Frater Williams & Co Ltd v Australian Guarantee Corporation (NZ) Ltd (1994) 2 NZ ConvC 191,873 (CA) at 191,887.[6] In the present case, clause 11.2 of the agreement between the parties reads as follows:[Newfoundworld] shall indemnify [Air NZ] from and against all losses, damage and costs incurred by [Air NZ] (excluding any consequential or indirect losses, damages or costs) arising out of or related to a breach by [Newfoundworld] of any of the warranties or any undertaking given by [Newfoundworld] or breach by [Newfoundworld] of any term or condition of this agreement.[7] Air NZ argues that it is entitled to an indemnity in respect of all costs incurred by it arising out of or related to the breach by Newfoundworld. It argues that clause 11.2 entitles it to recover its total costs on a solicitor-client basis, and says that if this were not the case, it would be left with part of the liability which the parties clearly intended Newfoundworld should be responsible for.[8] Newfoundworld submits that the costs Air NZ is seeking to claim are consequential or indirect costs, expressly excluded by clause 11.2. It says that AirNew Zealand's costs relate not to its breach of the agreement, but rather to the takingof Court action in respect of the breach. It argues that the costs are a step removed from the breach found by me in my substantive judgment.[9] Indemnity provisions are to be interpreted upon ordinary principles of construction. They require consideration of the language used in the context of the agreement as a whole and in its factual matrix.4[10] An indemnity clause does not need to expressly refer to indemnity costs, or solicitor-client costs, or even to legal costs, in order to confer the right to indemnity costs.5 The Courts have held that an entitlement to recover all costs permits recovery of indemnity costs.6[11] The clause at issue in the present case requires Newfoundworld to indemnify Air NZ from and against direct losses, damages and costs that either:4 Watson & Son Ltd v Active Manuka Honey Association [2009] NZCA 595 at [21].5 At [22]; Beecher v Mills [1993] MCLR 19 (CA) at 25.6 See, eg Malvern Urban District Council v Malvern Link Gas Co (1900) 83 LT 326 at 328; ReAdelphi Hotel (Brighton) Ltd [1953] 2 All ER 498; Pangani Properties Ltd v Owens Transport Ltd HC Auckland CIV-2001-404-2036, 12 July 2004 at [25]; Suttie v Bridgecorp Ltd HC Auckland CIV-2006-404-3667, 8 December 2006 at [17]; Anglesea Medical Properties Ltd v Braemar Hospital Ltd HC Hamilton CIV-2006-419-1492, 9 October 2007 at [61].(a) arise out of Newfoundworld's breach; or(b) are related to that breach.There is, however, a proviso. Newfoundworld is not required to indemnify Air NZ for consequential or indirect losses, damages or costs.[12] Costs are not damages,7 and they do not arise out of the breach of a contract. Rather, costs "are losses flowing from steps taken by [persons] to enforce [their] contractual rights, rather than flowing from the breach itself".8[13] Air NZ's solicitor/client costs do not arise out of the breach byNewfoundworld. Clause 11.2 does, however, refer disjunctively to costs that are related to the breach. This connotes a connection or link between the costs and the breach.9[14] Here, there was a clear connection between the legal proceedings taken by Air NZ, the associated costs of taking those proceedings, and the breach. There would have been no proceedings (and no costs) were it not for the breach. But for the proviso, I would take the view that Newfoundworld is required to indemnify Air NZ from and against its costs related to the breach.[15] The difficulty from Air NZ's perspective is that clause 11.2 goes on to exclude from the indemnity "any consequential or indirect" costs. The questionbecomes – are Air NZ's solicitor/client costs consequential or indirect?[16] Black's Law Dictionary defines a consequential or indirect loss as a loss arising from the results of damage rather than from the damage itself, and7 Cockburn v Edwards (1881) 18 Ch D 449 at 459 and 462; And see G E Dal Pont Law of Costs(3rd ed, LexisNexis Butterworths, Chatswood, 2013) at [7.21].8 Boswell v Millar [2014] NZCA 314, [2014] 3 NZLR 332 at [50]; and see Herbison v Papakura Video Ltd (No 2) [1987] 2 NZLR 720 (HC) at 735.9 Official Assignee v Haines House Removals Ltd [2013] NZCA 480 at [16].consequential or indirect damages as losses that do not flow directly and immediately from the injurious act, but result indirectly from the act.10[17] As I have noted in [12], the Courts have rejected the notion that legal costs are natural costs resulting immediately and proximately from a breach; they are not a direct result of the breach itself, but rather are consequential or indirect because they flow from steps taken to enforce the contractual rights. They are costs related to, rather than arising from, a breach.[18] It follows that clause 11.2 is, in my view, ambiguous. The clause extends the indemnity to costs that do not arise from the breach, but which are related to it. Uno flatu it excludes consequential and indirect costs which, by definition, are costs that do not arise from the breach, but are related to it. Effectively the indemnity gives with the one hand but takes away with the other.[19] Reference to the contract and the factual matrix does not assist in working out what the clause means or was intended to mean.[20] In the circumstances, I fall back on the contra proferentem rule, and construe the clause against Air NZ as the party who drafted it. To adopt the words ofHammond J, I have relied on this rule as the "tie-breaker",11 which penalises the careless drafting of Air NZ. As a result, I conclude, albeit not without some hesitation, that the solicitor/client costs which Air NZ is seeking to recover are consequential or indirect costs, excluded from the indemnity put in place by clause 11.2.Costs under the High Court Rules[21] It follows that Air NZ's entitlement to costs falls to be considered not under r14.6(4)(e), but rather under the balance of the costs regime set out in the High Court Rules.10 Bryan A Garner (ed) Black's Law Dictionary (10th ed, Thomson Reuters, Minnesota, 2014) at 472 and 1087-1088; And see Peter Spiller (ed) New Zealand Law Dictionary (8th ed, LexisNexis,Wellington, 2015) at 61, 77 and 179; Halsbury's Laws of England (5th ed, 2014, vol 29 Damages at [313]; Harvey McGregor McGregor on Damages (19th ed, Sweet & Maxwell, London, 2014) at [3-007]-[3-016].11 BP Oil NZ Ltd v BA Motors (NZ) Ltd [1996] 1 NZLR 425 (HC) at 430.[22] Under the rules, an award of costs should reflect the complexity and significance of the proceeding, and should be assessed by applying the appropriate daily recovery rate to the time considered reasonable for each step reasonably required in relation to the proceeding.12[23] Here, both counsel have proceeded on the basis that the costs in issue in this case should be fixed on a 2B basis – that is, on the basis that they were proceedings of average complexity requiring counsel of skill and experience considered average in the High Court, where a normal amount of time for each step was reasonable.13[24] I do not disagree with counsel for the parties that costs fixed on a 2B basis are appropriate for these proceedings. Counsel are also agreed that costs fixed on a 2B basis total $50,454.[25] Air NZ seeks increased costs under r 14.6(3)(b)(v). That rule provides that a Court can order a party to pay increased costs if that party has failed, without reasonable justification, to accept an offer of settlement under r 14.10. Relevantly, r 14.10 provides as follows:(1) A party to a proceeding may make a written offer to another party at any time that—(a) is expressly stated to be without prejudice except as to costs; and(b) relates to an issue in the proceeding.[26] The rationale for these rules was described by the Court of Appeal in Moore v McNabb14 as follows:In summary, it is a requirement of fairness that litigants — particularlydefendants — have some economic means of limiting their exposure to therisk of costs; and secondly the Court itself must ensure that a procedure ofthis character operates as an effective encouragement to settle.[27] Air NZ points to the following:12 High Court Rules 2016, r 14.2.13 High Court Rules 2016, r 14.3 and r 14.5.14 Moore v McNabb (2005) 18 PRNZ 127 (CA) at [58].(a) In September 2015, it sent a letter to Newfoundworld's solicitors,setting out the then basis for its claim, which it calculated as amounting to HKD $6,844,500. It advised that it was prepared to accept HKD $6,000,000 as a compromise;(b) In late October 2015, Newfoundworld's solicitors responded, rejecting this offer, and advising that Newfoundworld would not be persuaded to make any counter offer simply to avoid litigation costs;(c) In September 2016, after the parties had completed discovery and finalised their respective pleadings, Air NZ sent to Newfoundworld a further settlement offer, pointing out what it considered to be both thekey aspects of its case and the difficulties with Newfoundworld'sdefences. Air NZ advised that it was prepared, by way of compromise, to accept 70 per cent of the amount claimed. It also indicated that it was prepared to meet with Newfoundworld to discuss settlement; and(d) In early October 2016, Newfoundworld responded. It rejected AirNZ's compromise offer. Newfoundworld advised that it was preparedto settle the matter on a "drop hands" basis. Newfoundworld did not respond to Air NZ's suggestion that the parties should meet to discusssettlement.[28] Air NZ says that the offer made by it in September 2016 was rejected without reasonable justification.[29] Newfoundworld responds by asserting that the earlier offer made in September 2015 required close to full payment, and that its refusal to accept the September 2016 settlement offer was reasonably justified. It says that the matter was not straightforward, that there were significant matters of fact in dispute between the parties, in particular what mutual agreements they had or had not reached in relation to the earlier 2011 agreement contract. It also points to the fact that Air NZ had failed to identify the breach for two years, and asserts that it was reasonable for it totake the stance that cross-examination would be required to get to the truth of the matter.[30] I agree that Newfoundworld's refusal to accept the September 2015 offer wasnot unreasonable. It was then too early for either party to properly assess the strengths and weaknesses of their respective positions.[31] I am not, however, persuaded that Newfoundworld's refusal to accept theSeptember 2016 settlement offer was reasonably justified. Air NZ, in the September 2016 letter, emphasised the difficulties presented by the terms of the 2013 agreement, and in particular the entire agreement clause. Air NZ was also asserting that there had been no mutual agreement under the earlier 2011 agreement. That issue did raise a factual dispute, but regardless of the outcome, the express terms ofthe 2013 agreement were a significant hurdle in Newfoundworld's path. The letterset out in some detail weaknesses which Air NZ perceived in the defences being mounted by Newfoundworld. While Newfoundworld did abandon some of its defences, notably rectification, it did not fully appreciate the difficulties the terms of the 2013 agreement posed for it. It should have done so.[32] Having reviewed the September 2016 letter and the October 2016 response, I consider that on balance, the majority of the points made by Air NZ were well made,and that they highlighted substantial difficulties with Newfoundworld's case from alegal perspective. In my judgment, Newfoundworld ought reasonably to have appreciated that it would be facing an uphill battle at trial, and Newfoundworld wasnot reasonably justified when it rejected Air NZ's offer to settle.[33] As a consequence, it is appropriate to order increased costs. Newfoundworld has not acted reasonably.15[34] As to the appropriate amount of the increase, I note the approach suggested by the Court of Appeal in Holdfast NZ Ltd v Selleys Pty Ltd.16 As I have noted, a costs assessment on a 2B basis amounts to $50,454. While Newfoundworld has acted unreasonably, I do not consider that it was grossly unreasonable. It was15 Bradbury v Westpac Banking Corporation [2009] NZCA 234, [2009] 3 NZLR 400 at [27].16 Holdfast NZ Ltd v Selleys Pty Ltd (2005) 17 PRNZ 897 (CA).entitled to be sceptical about Air NZ's delay in bringing the proceedings. It mighthave hoped that cross-examination would throw some light on the dispute, albeit that it was never going to get over the hurdle presented by the terms of the 2013 agreement. In my view, the appropriate increase is one of 25 per cent – namely $12,613.50.[35] It follows that I make a costs award, in favour of Air NZ and against Newfoundworld, of $63,067.50.Disbursements[36] Air NZ has claimed the cancellation fee for the audio visual link. It was initially proposed that an audio visual link would be utilised by Ms Lee when she gave evidence. It also seeks the copying cost of the bundle which was sent to Ms Lee in Hong Kong.[37] In the event, Ms Lee was unable to give evidence by way of AVL because the bundle sent to her did not arrive on time. Rather, Air NZ flew Ms Lee to Auckland, and she gave evidence viva voce before the Court. There was no cost to Air NZ in arranging for her travel.[38] I am not persuaded that it is appropriate to award disbursements to Air NZ to cover either the cancellation fee for the audio visual link or the cost of the bundle. Newfoundworld agreed to use AVL for Ms Lee. She had to have the common bundle so she could give her evidence. Air NZ was responsible for ensuring that the common bundle arrived on time. It failed to do so. In my judgment, it is not open to Air NZ to foist wasted costs on Newfoundworld when it was responsible forensuring that AVL could be used for Ms Lee's evidence.[39] Unchallenged disbursements amount to $13,267.10. Again, I give judgment in this sum in favour of Air NZ and against Newfoundworld._____________________________Wylie J