FLUJO HOLDINGS PTY LTD v MERISANT COMPANY INC & ORS [2018] NZCA 226

FLUJO HOLDINGS PTY LTD v MERISANT COMPANY INC & ORS [2018] NZCA 226 [29 June 2018]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA548/2017[2018] NZCA 226BETWEEN FLUJO HOLDINGS PTY LIMITEDAppellantAND MERISANT COMPANY INCORPORATEDFirst RespondentMERISANT AUSTRALIA PTY LIMITEDSecond RespondentSUGAR AUSTRALIA PTY LIMITEDThird RespondentNEW ZEALAND SUGAR COMPANYLIMITEDFourth RespondentHearing: 18 April 2018Court: Cooper, Dobson and Toogood JJCounsel: D L Marriott for AppellantC L Elliott QC and J B Rutter for RespondentsJudgment: 29 June 2018 at 11 amJUDGMENT OF THE COURTA The application for an extension of time to appeal is granted.B The appeal is dismissed.C The appellant must pay the respondents costs for a standard appeal on aband A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Dobson J)Introduction[1] This is an appeal from two costs decisions. The first awarded a contribution toactual costs incurred by the respondents (Merisant) when the appellant (Flujo) wasdeemed to have acted unreasonably in discontinuing its proceeding one working daybefore a five-day substantive fixture.1[2] Fitzgerald J awarded indemnity costs of $58,035, which her Honour calculatedon the basis that sum represented 40 per cent of actual costs incurred by Merisant inthe final three weeks of trial preparation, up to the discontinuance on the eve of trial.2Fitzgerald J rejected Merisant's claims for full indemnity for that period, and alsorejected claims for indemnity or increased costs for earlier stages in the litigation.Flujo now argues that there were no grounds for any award of indemnity costs and thatthe quantum awarded was excessive.[3] Alongside its argument regarding costs, Merisant had unsuccessfully soughtan order to vary the terms of the discontinuance filed by Flujo so as to preclude theprospect of fresh proceedings advancing the same claims. Merisant was also deemedby Fitzgerald J to have substantially failed in its application for indemnity costs forthe entire proceedings. Her Honour formed the provisional view that Flujo wasentitled to costs on the argument on those issues.[4] In the second costs decision, the Judge ordered 2B scale costs in favour of Flujoin respect of the costs and discontinuance applications.3 Her Honour reduced that by30 per cent to reflect the extent to which Merisant had succeeded in obtainingindemnity costs for the last three weeks of trial preparation.1 Flujo Holdings Pty Ltd v Merisant Co [2017] NZHC 1656, [2017] NZAR 1395 [firstcosts judgment].2 For the period of 10 April 2017 to 28 April 2017.3 Flujo Holdings Pty Ltd v Merisant Co [2017] NZHC 2069 [second costs judgment].[5] The amount is modest, but Flujo also appeals against that 30 per cent reductionon the grounds that it does not reflect the respective merits of the parties' positions onthose arguments and their outcome.Leave to appeal out of time[6] Merisant objected to the appeal against the first costs decision being heard onthe ground that Flujo had not applied for leave to file the appeal out of time. The firstcosts judgment was issued on 18 June 2017, and a notice of appeal was filed andserved on 25 September 2017. That was substantially outside the 20 working daysafter delivery of the judgment within which any appeal should have been brought.4[7] Mr Marriott for Flujo disputed that time ran from the date of delivery of thefirst costs decision because its effect could not adequately be assessed until deliveryof the second costs decision issued on 28 August 2017. The present appeal wascommenced within 20 working days after that.[8] The outcome on the first costs decision was not contingent in any way on theoutcome of the costs issues determined in Fitzgerald J's second costs decision. Itreflected a complete determination and was, subject to the judgment being sealed,enforceable in the usual way once issued.[9] At the hearing, the Court indicated its likely rejection of Mr Marriott'sargument for deferring the commencement of time for filing the appeal. He requesteda short adjournment to take instructions on making an oral application for leave toextend time for the bringing of the appeal. After the adjournment, Mr Marriott madean oral application on the grounds that, from the appellant's perspective, the scope ofthe appeal remained unclear until delivery of the second judgment and that, in anyevent, Merisant was not prejudiced by the delay.[10] For Merisant, Mr Elliott QC submitted that the delay in pursuit of the appealwas merely the last in on-going delays that have frustrated Merisant's attempts toclarify the propriety of its commercial conduct. Such on-going delays have4 Court of Appeal (Civil) Rules 2005, r 29.contributed to increases in the costs of defending its position. Mr Elliott conceded thathe was ready and able to respond to the issues raised by the appeal, and could not pointto any specific prejudice resulting from the delayed filing of the appeal.[11] The Court determined that the appeal had been filed out of time. In the absenceof material prejudice, leave was granted for the extension of time for the periodrequired up to the date on which the appeal was commenced.History of the proceeding[12] The parties are competitors in the production of sweetener productsconventionally used as a substitute for sugar. In May 2016, Flujo commencedthe proceedings against Merisant alleging passing off, breach of the Fair Trading Act1986 and infringement of a registered trademark in the allegedly confusingly similarget-up of sweetener products being marketed in New Zealand.[13] In August 2016, an application for an interim injunction to restrain marketingof Merisant's product was dismissed by Courtney J.5 Thereafter, the substantiveclaims were prepared for trial with something of a pattern of Merisant complaining ofinadequacies and delays in Flujo's discovery and the service of briefs of evidence.[14] A five-day substantive hearing was scheduled for 1 May 2017.On 26 April 2017, Mr Marriott and his then instructing solicitor made application forleave to withdraw respectively as counsel and solicitor for Flujo. The ground for theapplication was non-payment of fees, in breach of the contract of retainer.On 27 April 2017, Wylie J granted the application for counsel and solicitors towithdraw.6 The minute recorded the Judge's warning that any application for anadjournment of the trial date might not be granted.[15] The following day, 28 April 2017, Wylie J heard an application for anadjournment of the trial advanced by Flujo's Australian solicitor, Mr Franklin.His Honour declined the application for an adjournment.7 That minute recorded5 Flujo Holdings Pty Ltd v Merisant Co [2016] NZHC 1779.6 Flujo Holdings Pty Ltd v Merisant Co HC Auckland CIV-2016-404-1019, 27 April 2017.7 Flujo Holdings Pty Ltd v Merisant Co HC Auckland CIV-2016-404-1019, 28 April 2017.advice from Mr Franklin that if the adjournment was not granted, Flujo mightdiscontinue the proceedings and file afresh. Wylie J's comment on that was "[t]hatcourse would likely have costs consequences but it is a matter for the plaintiff."8[16] Shortly before 5.00 pm on that Friday afternoon, effectively the eve of trial,Flujo filed a notice of discontinuance. Merisant's response was to file an applicationto vary the conventional terms of the discontinuance that Flujo had filed so as topreclude the commencement of other proceedings advancing the same or substantiallysimilar claims, and to seek indemnity or increased costs for all its participation inthe proceedings.First costs judgment[17] Fitzgerald J reviewed the parties' competing positions on:(a) whether the relative weakness of Flujo's claims ought to have been apparentfrom the terms in which Courtney J dismissed the interim injunctionapplication;(b) the extent of Flujo's delays and alleged intransigence in progressing the casetowards trial;(c) whether the Court could form a view on Merisant's claim that Flujo had beenunreasonable in rejecting a settlement offer; and(d) the relative unreasonableness of Flujo's conduct in the period immediatelybefore trial, resulting in wasted costs being incurred for Merisant where itanticipated it would have to repeat a substantial amount of the final trialpreparation if and when Flujo obtained a fixture for subsequent proceedingson the same or substantially similar claims.[18] Fitzgerald J held that she was not in a position to assess the merits of the claimsto an extent that could be relied on in making a finding on the reasonableness of Flujo8 At [15].persisting after its unsuccessful interlocutory injunction application, or on thereasonableness of rejecting Merisant's settlement offer. The consequences of Flujo'sdelays in compliance with timetabling had been separately addressed in a costsjudgment in April 2017.9[19] Her Honour declined to grant the application for indemnity costs for the wholeproceedings.10 However, the Judge found that Flujo's conduct in the immediatepre-trial period was very unreasonable.11 The predicament in which Flujo found itselfwas entirely of its own making, and a significant portion of Merisant's costs inpreparing for trial in the immediate pre-trial period were likely to be wasted.12[20] The Judge acknowledged the general rule that indemnity costs are exceptionaland will only be awarded where a party has behaved badly, very unreasonably or isguilty of flagrant misconduct.13 The Judge found that Flujo's conduct in the immediatepre-trial period justified an order that would require a contribution to Merisant's actualcosts.14 The affidavit evidence detailed costs of some $145,000 excluding GST anddisbursements in the period between 10 April 2017 and 28 April 2017. Recognisingthat some of the pre-trial steps may be able to be utilised in fresh proceedings,the Judge considered that a 40 per cent contribution to these immediate pre-trial costswould be appropriate.15 To avoid any doubling up, her Honour directed that this awardwould replace what Merisant might otherwise claim on a scale basis for steps 30, 32and 33 in sch 3 to the High Court Rules 2016.16 Costs on the remaining steps inthe proceedings would be calculated on a 2B basis.[21] The Judge rejected the alternative of Merisant's claim for increased costsacross the whole proceeding. Recognising that only costs associated with theimmediate pre-hearing period justified assessment on other than a scale basis,9 Flujo Holdings Pty Ltd v Merisant Co [2017] NZHC 811.10 First costs judgment, above n 1, at [84].11 At [85].12 At [85].13 At [81]; citing Telstra New Zealand Holdings Ltd v Commissioner of Inland Revenue (2010) 21PRNZ 1 (HC) at 65; and Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] 3 NZLR400 at [27]–[29].14 At [85].15 At [87].16 Those steps are for preparation of briefs or affidavits, preparation of lists of issues, authorities andcommon bundle, and preparation for hearing.her Honour did not address the prospect of increased costs for that period because ofher ruling on entitlement to indemnity costs at a portion of the actual costs incurred.Second costs judgment[22] Fitzgerald J separately considered competing costs applications on theargument of Merisant's applications to vary the terms of the discontinuance, and forindemnity or increased costs. The Judge dealt with those applications on the papersand issued her second costs judgment on 28 August 2017. She recognised that Flujohad been largely successful in its defence of the applications and that Merisant hadonly clarified its fall-back position on seeking increased or indemnity costs for thediscrete pre-trial periods during oral submissions.17[23] The Judge assessed that the appropriate course was to award scale costs toFlujo, but to reduce their extent by 30 per cent to reflect the not insignificant award ofindemnity costs Merisant had obtained.18Grounds of appeal[24] Mr Marriott accepted that the costs decisions constituted the exercise of adiscretion so that Flujo had to discharge the onus of showing that the Judge was plainlywrong, had acted on a wrong principle, took into account irrelevant matters or failedto take into account relevant ones. He sought to discharge that onus in the challengeto the first costs judgment by arguing that determining the quantum of costs byreference to the extent of costs actually incurred by Merisant breached the overridingprinciple that, so far as possible, costs determinations should be predictable andexpeditious. Further, he argued that indemnity costs were only warranted in trulyexceptional circumstances or where a party had behaved exceptionally badly, butneither finding could be made in respect of Flujo's conduct of the proceeding.[25] Mr Marriott also argued that the 40 per cent contribution to actual costs wasnot reasonable, and that the extent of those costs was excessive for the tasks involved.They were also excessive by reference to the determination of reasonable time for17 Second costs judgment, above n 3, at [18].18 At [20].relevant steps under the High Court Rules when calculated on a 2B basis that wasotherwise appropriate for the proceeding.[26] For Merisant, Mr Elliott disputed each of these grounds, made strong criticismsof the unreasonableness of Flujo's conduct throughout the proceedings, but inparticular in the lead up to discontinuance, and justified quantum by reference todetailed fee notes and the scale of the tasks reasonably undertaken.[27] Flujo's challenge to the 30 per cent reduction in the costs ordered in its favourin the second costs judgment depended on the success of its arguments in challengingthe first: if Merisant was not entitled to costs on an indemnity basis for the immediatepre-trial preparation, then it would follow that the Judge had erred in reducingFlujo's costs entitlement by 30 per cent for opposing that application.Discussion[28] The last of seven overriding principles applying to the determination of costsis that, as far as possible, the determination of costs should be predictable andexpeditious.19 After provisions for scale costs in rr 14.3–14.5, the prospect ofincreased costs and indemnity costs is provided for in r 14.6. It begins in the followingterms:14.6 Increased costs and indemnity costs(1) Despite rules 14.2 to 14.5, the court may make an order—(a) increasing costs otherwise payable under those rules(increased costs); or(b) that the costs payable are the actual costs, disbursements, andwitness expenses reasonably incurred by a party(indemnity costs).(2) The court may make the order at any stage of a proceeding and inrelation to any step in it.19 High Court Rules, r 14.2(1)(g).[29] The rule then provides for the circumstances in which the Court may orderparties to proceedings to pay increased costs and, on separate criteria, indemnity costs.Generally, the criteria for ordering increased costs are less onerous to make out thanthose for indemnity costs. Criticisms of the party liable to costs are therefore likely toescalate in their relative seriousness from the circumstances warranting increased coststo those that warrant indemnity costs. However, that is not necessarily the case. In thisappeal it is appropriate to focus on whether there was any error in the Judge findingthat the criteria for indemnity costs were made out first. The relevant part of r 14.6 isexpressed as follows:(4) The court may order a party to pay indemnity costs if—(a) the party has acted vexatiously, frivolously, improperly, orunnecessarily in commencing, continuing, or defending aproceeding or a step in a proceeding; or(b) the party has ignored or disobeyed an order or direction ofthe court or breached an undertaking given to the court oranother party; or(c) costs are payable from a fund, the party claiming costs is anecessary party to the proceeding affecting the fund, andthe party claiming costs has acted reasonably inthe proceeding; or(d) the person in whose favour the order of costs is made was nota party to the proceeding and has acted reasonably in relationto it; or(e) the party claiming costs is entitled to indemnity costs under acontract or deed; or(f) some other reason exists which justifies the court making anorder for indemnity costs despite the principle that thedetermination of costs should be predictable and expeditious.[30] Having distinguished the character of Flujo's conduct throughout all earlierstages of the proceeding, Fitzgerald J found that Flujo's conduct leading to theproceeding being discontinued was very unreasonable. That view accorded with theview adopted by Wylie J in refusing to grant an adjournment of the fixture.[31] Mr Marriott submitted that there must be conduct that is truly exceptionalbefore the general costs principles (including the principle that the determination ofcosts should be predictable and expeditious) can be displaced.[32] Mr Marriott relied on the Supreme Court's observation in Prebble v AwatereHuata (No 2):20[6] In New Zealand, costs have not been awarded to indemnify successfullitigants for their actual solicitor and client costs, except in rare cases generallyentailing breach of confidence or flagrant misconduct. Except in such cases,in both the Court of Appeal and the High Court orders for party and party costshave been limited to a reasonable contribution to the costs of the successfulparty. [33] Mr Marriott also relied on the observation of this Court in Bradbury v WestpacBanking Corp, reflecting the Supreme Court's stance:21Indemnity costs, which depart from the predictability of the RulesCommittee's regime, are exceptional and require exceptionally bad behaviour.That is why to justify an order for such costs the misconduct must be"flagrant".[34] Where a plaintiff is entirely responsible for a last minute discontinuance in aproceeding of this type because of an unresolved dispute with its legal advisers overpayment of their fees, then the conduct leading to discontinuance is indeed veryunreasonable. This was relatively complex commercial litigation betweentrade competitors. Allegations of passing off generally carry with them impliedcriticism of the commercial morality of the defendant which justifies a strenuousresponse. The categorisation of Flujo's conduct as very unreasonable is, in thesecircumstances, a reasonable synonym for the forms of conduct that are listed inr 14.6(4)(a). A generic summary of conduct that is vexatious, frivolous, improper orunnecessary is that it would be very unreasonable.[35] Alternatively, those circumstances constitute another reason justifying an orderfor indemnity costs under r 14.6(4)(f).[36] Mr Marriott's criticism that the Judge ranked Flujo's conduct as much worsethan it really was loses its impact when the focus is confined to the last fortnight beforetrial. The Judge was entitled to treat that final part of the pre-trial preparationseparately from all the steps that had gone before. Flujo's conduct in that period oflittle more than two weeks did constitute flagrant misconduct when the disruption was20 Prebble v Awatere Huata (No 2) [2005] NZSC 18, [2005] 2 NZLR 467 (footnotes omitted).21 Bradbury v Westpac Banking Corp, above n 13, at [28].solely of its own making, causing Merisant to be left ostensibly fully prepared buthaving thereafter to regroup for the anticipated further set of proceedings.[37] Put another way, Flujo was misguided if it considered that the general principlethat cost outcomes be predictable and expeditious would limit the adverseconsequences of its extraordinary pre-trial behaviour to paying scale costs to Merisant,when it must have known the likely extent to which that would leave Merisant out ofpocket.[38] Mr Marriott submitted the Judge was wrong to take into account, whenevaluating any misconduct by Flujo in the last fortnight before its discontinuance, theconsequence that it resulted in Merisant incurring allegedly wasted costs. He arguedthat a contribution to such costs in accordance with scale was all that Merisant couldexpect, and that the (uncertain) prospect that costs of final trial preparation would beincurred again could be addressed on its merits when that in fact had happened,depending on the eventual outcome of the proceeding. Alternatively, if at all, thisconcern ought to have been addressed by considering increased costs on astep-by-step basis.[39] We are satisfied that the Judge attributed no more than appropriate relevanceto the nature of the intensive work Merisant reasonably undertook in the final fortnightbefore trial. It is a stage at which, in a proceeding of this type, a responsible defendantwould commit substantial resources to trial preparation, the utility of which would bemuch reduced if the trial did not proceed forthwith.[40] Late adjournments are often granted with the applying party having to make acontribution to the wasted costs incurred by the opposing party. It is a circumstancein which judges routinely nominate an amount without relating it to scale costs forpre-hearing steps. Where such costs are wasted in circumstances that are entirelyattributable to the plaintiff's breach of retainer with its legal advisers, thosecircumstances go to the extent of unreasonableness of Flujo allowing that predicamentto develop.[41] Mr Marriott also criticised the Judge's decision to fix the indemnity at40 per cent of the costs that had been incurred. In essence, if the flagrancy of themisconduct by Flujo was not sufficient to justify indemnity for all, or substantially all,of those costs, then arguably the case was not an appropriate one for treatment on anindemnity costs basis. Implicitly, his criticism was that invoking the indemnity costsrule when the indemnity was for less than half of the costs that had been incurredlowered the barrier for invoking the rule below the high standard that should bemaintained.[42] However, Mr Marriott's submission reverses the order in which the issues needto be addressed. The first question is whether a party has been responsible for conductthat merits an award of indemnity costs, that is, does r 14.6(4) apply? We have alreadyrecorded our view that this was such a case. The second question is what the level ofthe indemnity costs should be. In that respect while it is customary to refer tothe solicitor and client costs actually incurred, there has always been a discretion toreduce that amount. The common situation is where for whatever reason the courtconsiders the costs are excessive. The Judge did not express the view that was thecase here, but it may be inferred that she thought the full amount should not berecoverable for various reasons. It may also be inferred she did not consider thatincreased costs within the kind of limits contemplated by the cases for a percentageincrease on scale would be sufficient to compensate the respondent for the appellant'sconduct.[43] As was said in Bradbury v Westpac Banking Corporation, indemnity costs arecalculated not from the costs rules but from a "reasonable allocation of actual costs",based on the appropriate time taken, the significance and complexity of the work, andthe appropriate hourly rate reasonably applicable.22 The fact that indemnity costs endup being calculated to be less than full indemnity, even significantly so, does not implythat the bar for the award of indemnity costs has been lowered; that question isanswered by asking whether r 14.6(4) applies. We see no reason why other factors,such as the consideration that the costs may not have been entirely wasted if the claim22 Bradbury v Westpac Banking Corp (2008) 18 PRNZ 859 (HC) at [209].eventually proceeds to a trial should not legitimately be part of the calculation. Takingthat into account was an approach that favoured the appellant.[44] Mr Marriott's written submissions stated that justification did not exist foreither indemnity or increased costs in this case. In oral submissions, he qualified thatstance as an aspect of the criticism of the quantum awarded. He submitted that evenif an award of increased costs for this aspect of the proceeding was warranted, thenthe quantum granted was excessive.[45] Mr Marriott urged that the approach to increased costs described in this Court'sjudgment in Holdfast NZ Ltd v Selleys Pty Ltd ought equally to apply here.23 Thatjudgment suggested an upper limit on the extent of increased costs at about 50 per centabove scale. He argued that this approach underscored the unreasonableness of40 per cent of actual costs, which amounted to some four times scale.[46] Merisant's costs application, in the alternative to seeking indemnity costs, wasto seek increased costs for the whole proceeding. Once the Judge had rejected themore ambitious claim in respect of indemnity costs for the whole proceeding, it wassensible and consistent with her reasons for doing so that the alternative claim forincreased costs for the whole proceeding also be rejected. As the Judge found that anindemnity costs approach was justified for the steps in the last fortnight pre-trial; therewas no reason for the Judge to consider the alternative of increased costs for that shortperiod as some form of cross-check to test the reasonableness of the outcome arrivedat on an indemnity costs basis. Rule 14.6(2) provides the Court with the power togrant indemnity or increased costs discretely for one or more steps in a proceeding.[47] In any event, the issues on appeal in Holdfast were very different to thosearising in the present appeal. In that case, the High Court had awarded increased costsof nearly four times scale, in reliance on findings of the perceived unreasonablenessof the plaintiff's rejection of a settlement offer and criticisms of the belated attempt toadjourn the hearing in order to add a further defendant. This Court found both of thosecriticisms to be unfounded and reconstructed a fresh costs analysis partly in response23 Holdfast NZ Ltd v Selleys Pty Ltd (2005) 17 PRNZ 897 (CA).to the extent by which the High Court order for increased costs had exceeded scale.No such considerations arise here.[48] There were considerations in this case that enabled the approach adopted toapply on a principled basis. Despite an indemnification approach being adopted,the Judge was concerned to balance that against the prospect, first, that all costsincurred might not have been wasted and, secondly, Flujo's criticism that Merisant'scosts were excessive. It is reasonably implicit that the percentage reduction also takesaccount of any concern that the level of costs actually incurred might have been morethan was reasonable for a case of this nature and complexity. We see no error in thecircumstances confronting the Judge in this case, in adopting indemnification for40 per cent of the costs incurred in the three week period leading up to the fixture date.We are not to be taken as endorsing the approach as one that is generally available.[49] Once Flujo's appeal against the first judgment is unsuccessful, the grounds forchallenging the 30 per cent reduction on scale awarded in its favour in the second costsjudgment largely fall away. Having upheld the first costs judgment, there can be nocriticism of the Judge's approach to the second award. It reflected Flujo's qualifiedsuccess in opposing Merisant's applications which was then appropriately discountedto reflect the extent to which their opposition was not successful.Result[50] The application for an extension of time to appeal is granted.[51] The appeal is dismissed.[52] The appellant must pay the respondents costs for a standard appeal on a band Abasis and usual disbursements.Solicitors:Hudson Gavin Martin, Auckland for AppellantKensington Swan, Auckland for Respondents