HARICOT INVESTMENTS LIMITED v MAEREWHENUA DISTRICT WATER RESOURCE COMPANY LIMITED [2015] NZHC 518

HARICOT INVESTMENTS LIMITED v MAEREWHENUA DISTRICT WATER RESOURCE COMPANY LIMITED [2015] NZHC 518 [18 March 2015]IN THE HIGH COURT OF NEW ZEALANDTIMARU REGISTRYCIV-2013-476-000193[2015] NZHC 518BETWEEN HARICOT INVESTMENTS LIMITEDPlaintiffAND MAEREWHENUA DISTRICT WATERRESOURCE COMPANY LIMITEDDefendantHearing: On the papers filed by 21 January 2015Appearances: C S Withnall QC and R M Reeve for PlaintiffR W Raymond and V M Hewart for DefendantJudgment: 18 March 2015JUDGMENT OF DUNNINGHAM JRE: COSTS DECISION[1] Following a five day civil hearing, where the plaintiff pursued six allegations that, as a shareholder in an irrigation scheme, it had been treated in a manner whichwas "oppressive, unfairly discriminatory or unfairly prejudicial" under s 174 of theCompanies Act 1993, I determined that the plaintiff was entitled to relief on one issue only.[2] In reserving costs, I observed that:While Haricot has had only limited success in these proceedings, I do recognise that the key issues of concern to Haricot being, the redemption of shares and the termination of its water supply, were only resolved once it issued these proceedings. Indeed the decision to rescind the resolution to redeem the shares was only notified to Haricot in the course of the proceedings.I concluded by saying my tentative view was that Haricot was entitled to 2B costs notwithstanding the outcome of the proceeding. If costs could not be agreed, I invited submissions on costs.[3] However, I did not anticipate the fervour with which the issue of costs would be debated. I received 16 pages of submissions from the plaintiff seeking 3C costs with a 50 per cent uplift. That was responded to by 63 pages of costs submissions, plus an annexure, from the defendant and, in turn, a memorandum of reply from the plaintiff comprising 53 pages, plus an annexure.[4] It is evident that the acrimony which prompted the proceedings has not abated. Even on the issue of costs, neither side has left a stone unturned.Plaintiff's position on costs[5] The plaintiff's position on costs is that it has enjoyed a substantial level of success and is entitled to costs on the usual principle that the party which failed should pay costs to the party which succeeds. It says it was only by bringing theproceeding that the plaintiff's key concerns were able to be resolved to itssatisfaction: it was not required to enter the water supply agreement unless cl 14.4 was revised, the decision to redeem shares was rescinded, its water supply was reconnected and cl 4.2 of the constitution is to be amended.[6] The plaintiff's starting point therefore is that, as agreed between the parties, this is a 3C category proceeding and, as the successful party, the plaintiff is entitled to 3C costs.[7] In support of the claimed uplift, the plaintiff submits that the time actually spent exceeded that allocated under band C. It also argues that there were other factors which added to the time required and, therefore, to the cost of bringing the proceeding. For example, it says the defendant did not disclose correspondence with the ANZ bank which the defendant was relying on to show that the signed water supply agreements were an express condition of its loans. Furthermore, documents were arranged by Document-ID, rather than chronologically, which prolonged the discovery process.[8] It also submits that it was not the aggressor; it was the defendant's acts of redeeming the plaintiff's shares and cutting off its water which compelled theplaintiff to take legal action to "preserve its economic survival".[9] It is critical of the defendant's solicitor not stepping aside from the conduct ofthe litigation earlier because, had he done so, the error of law inherent in the proposed share redemption would have been identified sooner. The plaintiff also rejects the suggestion that its proceedings lacked clarity because the statement of claim was not adequately particularised, saying it was intended to be inclusive and it sought general relief.Defendant's position on costs[10] The defendant, in contrast, said that the plaintiff failed in relation to all of its complaints (both pleaded and raised in the course of the hearing) other than the complaint in relation to cl 14.4 of the water supply agreement. It should only, therefore, be considered to have had very limited success.[11] However, the defendant goes further and submits that the plaintiff should be refused costs, primarily because of its conduct in the litigation. The litigationstemmed from the plaintiff's blanket objection to signing a new water supply agreement when that could never have been acceptable to the defendant as it risked not complying with the bank's requirements. That refusal was characterised asunreasonable because it was prompted by the plaintiff's desire to avoid paying for an extension to the defendant's water scheme rather than on a principled concern aboutits drafting.[12] In respect of the submission that the time required substantially exceeded the allotted time under band C, the defendant says the actual time spent is irrelevant, and the plaintiff has failed to explain why the nature of the proceedings was such that the time allocated under band C was inadequate.[13] In respect of the complaints about disclosure and discovery, the defendant says that the failure to disclose the correspondence with the ANZ in a timely way could not have contributed unnecessarily to the time or expense of the proceeding or a particular step in it. In particular, the defendant had argued that by virtue of the existing encumbrance, it had complied with the bank's requirements for a signedwater supply agreement, so the need to see the documents demonstrating the bank'srequirement was not pivotal. In respect of the complaint about the organisation ofdocuments in the discovery process, the defendant says that when it was asked to provide a chronological list, it did so within two days of the request.[14] In relation to the share redemption issue, the plaintiff's reasons for asserting that the redemption was unlawful were not the reasons that the defendant ultimately accepted made the redemption unlawful. Instead, that was a technical argument to do with compliance with s 68(b) of the Companies Act. In any event, the redemptionissue was not the "major issue" and the plaintiff has failed to identify those steps in the proceeding to which it says the defendant's conduct unnecessarily contributed to their time and expense.[15] In respect of the plaintiff's criticisms of the role of the defendant's solicitorwho had been advising the defendant on the commercial matters which lead to the dispute, the defendant says the plaintiff failed to specify its concerns about the defendant's solicitor's independence when requested to and, in any event, those concerns were balanced out by the appointment of independent senior counsel during the course of the litigation.[16] The defendant also says that on the one issue the plaintiff was successful on, it did not articulate that specific concern until the time of hearing. The issue with cl 14.4 was not pleaded and, had the plaintiff explicitly raised it sooner, the matter could have been discussed and resolved between the parties without the need to issue proceedings.[17] The defendant also rejects the plaintiff's assertion that the litigation was ofbenefit to other shareholders by exposing shortcomings in the defendant's governingdocuments. The "shortcomings" related to the drafting of cl 14.4 in the water supply agreement and to a technical non-compliance with s 68(b) of the Companies Act 1993 in the constitution. These were not expressly raised until the plaintiff'sopening submissions were filed and, if raised sooner, they would have been addressed and thus avoided the significant costs of running the claim and the consequent cost to all shareholders.[18] The defendant also challenges the claim for some of the plaintiff'sdisbursements. In particular, it says the plaintiff's claim for expert witness fees in relation to the value of the shares should be denied because the plaintiff's expertseventually accepted the defendant's experts' position on the appropriate methodology for valuing the shares which resolved the differences in valuation. That issue was therefore not required to be determined at the hearing. As a consequence the defendant says they did not add any value to the proceedings. The plaintiff on the other hand asserts the concessions were made in accordance with the Code of Conduct for Expert Witnesses and, implicitly, that the plaintiff should not be penalised for its witness complying with those obligations.[19] The defendant also challenges the amount of approximately $1,600 claimed for in-house photocopying, toll calls, couriers, postage and stationery as it is not explained why these office expenses were 'necessary and specific to the litigation".[20] The defendant seeks costs on preparing its memorandum on a 2B basis.Relevant principles on costs application[21] The principles governing the exercise of the Court's discretion to award costsare set out at r 14.2 of the High Court Rules as follows:(a) the party who fails with respect to a proceeding or an interlocutory application should pay costs to the party who succeeds:(b) an award of costs should reflect the complexity and significance of the proceeding:(c) costs 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 or interlocutory application:(d) an appropriate daily recovery rate should normally be two-thirds of the daily rate considered reasonable in relation to the proceeding or interlocutory application:(e) what is an appropriate daily recovery rate and what is a reasonable time should not depend on the skill or experience of the solicitor or counsel involved or on the time actually spent by the solicitor or counsel involved or on the costs actually incurred by the party claiming costs:(f) an award of costs should not exceed the costs incurred by the party claiming costs:(g) so far as possible the determination of costs should be predictable and expeditious.[22] The primary argument advanced by the parties were focused on the principles in rr 14.2(a) and 14.7 given their differing views as to the extent of success the plaintiff achieved in the litigation.[23] Both parties then either expressly, or by implication, referred to r 14.6 of the High Court Rules to say there were factors which justified either an increased costs award or a refusal of, or a reduction in, costs. Specifically, under r 14.6:(3) The court may order a party to pay increased costs if—(a) the nature of the proceeding or the step in it is such that the time required by the party claiming costs would substantially exceed the time allocated under band C; or(b) the party opposing costs has contributed unnecessarily to the time or expense of the proceeding or step in it by—(i) failing to comply with these rules or with a direction of the court; or(ii) taking or pursuing an unnecessary step or an argument that lacks merit; or(iii) failing, without reasonable justification, to admit facts, evidence, documents, or accept a legal argument; or(iv) failing, without reasonable justification, to comply with an order for discovery, a notice for further particulars, a notice for interrogatories, or other similar requirement under these rules; or(v) failing, without reasonable justification, to accept an offer of settlement whether in the form of an offer under rule 14.10 or some other offer to settle or dispose of the proceeding; or(c) the proceeding is of general importance to persons other than just the parties and it was reasonably necessary for the party claiming costs to bring it or participate in it in the interests of those affected; or(d) some other reason exists which justifies the court making an order for increased costs despite the principle that the determination of costs should be predictable and expeditious.[24] High Court Rule 14.7 allows the Court to refuse to make an order for costs or to reduce costs otherwise payable if:(a) the nature of the proceeding or the step in a proceeding is such that the time required by the party claiming costs would be substantially less than the time allocated under band A; or(b) the property or interests at stake in the proceeding were of exceptionally low value; or(c) the issues at stake were of little significance; or(d) although the party claiming costs has succeeded overall, that party has failed in relation to a cause of action or issue which significantly increased the costs of the party opposing costs; or(e) the proceeding concerned a matter of public interest, and the party opposing costs acted reasonably in the conduct of the proceeding; or(f) the party claiming costs has contributed unnecessarily to the time or expense of the proceeding or step in it by—(i) failing to comply with these rules or a direction of the court; or(ii) taking or pursuing an unnecessary step or an argument that lacks merit; or(iii) failing, without reasonable justification, to admit facts, evidence, or documents, or accept a legal argument; or(iv) failing, without reasonable justification, to comply with an order for discovery, a notice for further particulars, a notice for interrogatories, or other similar requirement under these rules; or(v) failing, without reasonable justification, to accept an offer of settlement whether in the form of an offer under rule 14.10 or some other offer to settle or dispose of the proceeding; or(g) some other reason exists which justifies the court refusing costs or reducing costs despite the principle that the determination of costs should be predictable and expeditious.[25] Finally, the defendant has sought costs on its costs application. I recognise, as was discussed in a recent article in the New Zealand Law Journal, that there are two streams of authority on this issue.1 The first recognises a practice against awards of costs in respect of applications for costs, while the second treats such applications on the basis of ordinary principles.[26] I accept that there is no impediment to the granting of costs on costs awards and that there should be no presumption against awarding costs on costs. As Allan J held in Body Corporate Administration Ltd v Mehta:2[85] It is now well established that costs may be awarded in respect of an application for costs. An application for costs is to be treated no differently for costs purposes from an ordinary interlocutory application, so costs may be awarded according to scale or an increased or indemnity basis as appropriate.[27] Furthermore, rather than creating further cause for dispute between the parties, I acknowledge that costs disputes may be resolved more readily if there were costs consequences for making or opposing costs applications unsuccessfully. I approach my decision on that part of the application in light of that position.Application of the principles to costs in these proceedingsRelative success[28] I accept that, for cost purposes, the parties had agreed the matter should be categorised as a 3C proceeding and that consistent with the principles in High Court r 14.2, including the requirement that the determination of costs should be"predictable and expeditious", that should be my starting point.[29] In tentatively proposing 2B costs, I had hoped to indicate that, while the plaintiff was entitled to costs, any award should be modest compared to its actual costs. This was because it had only modest success and had it, from the outset, constructively focused its litigation on the points which it ultimately succeeded on, I have no doubt that the litigation would have been concluded more quickly, perhaps even without a hearing.1 David Bullock and Julian Long Costs of costs applications [2014] NZLJ 348.2 Body Corporate Administration Ltd v Mehta [2013] NZHC 213.[30] Put in general terms, the litigation began with a blanket refusal to sign a water supply agreement required by the new constitution, despite the company resolving that it was appropriate that one be drafted to comprehensively set out the terms and conditions on which water was supplied. Such an agreement was required, both for the efficient administration of the scheme and, in due course, to meet the requirements of the bank and the Regional Council. I effectively found that the plaintiff's blanket refusal was misguided, but that in one respect, which related to the drafting of an indemnity clause in the agreement, the plaintiff was disadvantaged and the clause needed redrafting. However, that was not identified by the plaintiff as a specific concern at the outset and, had it done so, the litigation would have been significantly more focused.[31] The other consequences, including the threatened determination of water and the decision to redeem the plaintiff's shares, all flowed from that general resistance to signing a water supply agreement rather than from the specific issues on which the plaintiff was ultimately successful. The other relief claimed by the plaintiff, including declarations that several clauses in the Constitution were ultra vires and orders deleting them, a non-specific order "setting aside the actions of the defendant complained of herein", an inquiry into damages suffered because of the interruption to the water supply, and an injunction restraining the defendant from "interfering with the [p]laintiff's rights under the [e]ncumbrance", were all unsuccessful.[32] Given the sweeping allegations the plaintiff made at the outset, most of which fell away under closer scrutiny and those that were substantiated were on grounds not identified by the plaintiff in its pleadings, I consider the plaintiff can only be considered partially successful. It is primarily for this reason, but also taking into account High Court Rule 14.7(d), that I think the costs award to the plaintiff should be substantially reduced. Accordingly, while calculating costs on a 3C basis, I consider they should be discounted by 66 per cent to reflect:(a) the actual degree of success the plaintiff had; and(b) had the issues on which the plaintiff ultimately succeeded (whether in the decision or during the course of the litigation) been clearly identified at the outset, then the litigation would have been a straightforward matter (if it advanced at all) and could have been concluded on a 2B basis.The claim for an uplift in costs[33] While the plaintiff has argued it should have an uplift on a costs award which recognised its success, it will be clear from the above discussion that I do not consider the matters raised warrant that.[34] While it may well be true that the time spent exceeded that allocated under a 3C costs allocation, I am guided by the principle in 14.2(c) that costs 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 or interlocutory application. The fact that the time spent significantly exceeded the time allocated under band C is, in my view, most likely because of the sweeping nature of the matters alleged in the pleadings which prompted a more than usually defensive position from the defendant.[35] Looking at the specific complaints made by the plaintiff about costs, the concerns raised about discovery and inspection issues do not, in my view, warrant an adjustment in costs. It appears the defendant promptly agreed to provide chronologically ordered documents when those were requested. While it accepts theANZ documentation was not supplied in a timely way, I accept the defendant's viewthat it is not explained how that conduct contributed unnecessarily to the time or expense of the proceeding or a step in it. The plaintiff did not concede that the bank required a signed copy of the new water supply agreement even when it had copies of the correspondence with the ANZ, so it is not obvious how this would have made a difference to the costs of the litigation.[36] I also note that one interlocutory application for production of documents was dealt with by Associate Judge Osborne on 18 August 2014, including associated orders for costs, so those steps must be ignored for the purpose of calculating costs in this proceeding.[37] I accept that in March 2013, when the plaintiff was arranging for service ofthe proceedings, it raised its concern about the defendant's solicitors acting on thismatter because of potential for conflict as identified in Kooky Garments Limited v Charlton.3 That case identified the danger of solicitors continuing to act in litigation where the firm is effectively defending its actions or advice and therefore may notact with the "objectivity and independence" which the client is entitled to, and which the Court demands.4[38] However, Mr Raymond was instructed when the litigation commenced and I accept he had the requisite independence to bring objectivity to the defence of the proceedings, so that cannot be a factor in the cost of the litigation. Furthermore, any intransigence by the defendant which may have been avoided by the earlier appointment of independent advisers was matched by the failure of the plaintiff to critically examine its sweeping claims and identify the real nub of its complaints.[39] The plaintiff also criticises the defendant as being the "aggressor" andunhelpful in its conduct of the proceedings. It says it was the defendant which cutoff the plaintiff's water supply, which of course precipitated the plaintiff filing its statement of claim. The plaintiff says that the defendant did not reciprocate theplaintiff's solicitors' provision of unsworn briefs of evidence until a number ofmonths later and the expert caucusing was only possible in the days before hearing. That precluded the parties exploring settlement at an earlier stage. It was only on the first day of hearing that counsel conceded the share redemption issue and, of course, by then the substantial expenses of seeking a legal determination of that matter had been incurred.3 Kooky Garments Limited v Charlton [1994] 1 NZLR 587.4 At 589.[40] However, I do not take into account steps up to the commencement of the litigation.5 It is inevitable that litigation commences because one party considers it has been wronged by another party in some way. That, of itself, cannot have a bearing on costs. Furthermore, the exchange of briefs in accordance with a Court ordered timetable, and without an express request to exchange earlier for the purpose of resolution of issues, also cannot justify an increase in costs.Disbursements[41] The plaintiff also seeks a little over $72,000 in disbursements, although the defendant resists payment of some of these. The defendant in turn says it should receive payment for the disbursements it has incurred.[42] The disbursements which the defendant objects to paying are:(a) $1,639.79 for in-house photocopying, toll calls, couriers, postage and stationery where it says their relationship to the litigation is not particularised; and(b) the expert witness fees for Mr Hamilton's evidence on replacementcost valuation for the scheme and for the evidence of Mr Cameron, from the accounting firm Deloitte, on the value of the shares.[43] The defendant objects to the disbursements claimed for expert evidence saying, in the end, the combined evidence of Mr Hamilton and Mr Cameron resulted in a share value figure which was less than the draft indicative valuation of $3,353 relied on by the defendant when issuing shares and meant that, effectively, the issues on which these witnesses were instructed fell away as irrelevant to the hearing. The defendant says the fact the plaintiff insisted on calling Mr Cameron should not be reflected in an award of this disbursement because his evidence, in the end, was not relevant to an issue in which the plaintiff succeeded and, in parts, was effectively a submission on matters which he did not have expertise to comment on.5 Paper Reclaim Ltd v Aotearoa International Ltd [2006] 3 NZLR 188.[44] The plaintiff, however, says the fact it did not call Mr Hamilton was becausehe had, as required, worked with the defendant's expert in accordance with his duties to the Court to narrow the issues in dispute. Mr Cameron's evidence helpedillustrate the plaintiff's concerns with cl 14.4 of the water supply agreement.[45] In respect of the challenged disbursement of $1,639.79, the plaintiff explains these reflect basic office expenses incurred by the plaintiff in the course of the proceeding and reflect the costs incurred for this kind of litigation and do not require the particularisation sought by the defendant.Recovery of disbursements[46] Rule 14.12(2) makes it clear that a disbursement can be recovered in a costs award for a proceeding if it is "claimed and verified" and "specific to the conduct of the proceeding", "reasonably necessary for the conduct of the proceeding" and "reasonable in amount".[47] There is also a definition of "relevant issue", in this rule which, inexplicably,is a term not mentioned in any other part of this rule, but which the defendant argues limits recoverability of disbursements to those incurred in respect of an issue on which the claiming party succeeded. However, I do not consider the rule is to be as rigidly applied as that. Experts can prepare evidence in anticipation of a dispute which does not materialise, or the evidence may not be determinative of the outcome, because it is reached on other grounds. For example, in Transport Investments Limited v Petroleum Logistics, the plaintiffs recognised they were not going to succeed in one of their arguments so there would be no need to call the expert valuers. 6 That meant there was no need to call the defendant's expert valuer,but Joseph Williams J had no hesitation in determining that the successful defendant was also entitled to the cost of their valuer who was not called.[48] The issue here is simply whether the expert witness fees were reasonably incurred in pursuing the proceeding or whether, as was held in Sherman Limited v Harlow, the expert witness fees were so unrelated to the issue on which the plaintiff6 Transport Investments Limited v Petroleum Logistics [2013] NZHC 2307 at [17].ultimately succeeded, or so bound up with claims on which the plaintiff failed, that it should not be entitled to include them in the disbursements award sought. 7[49] In my view, the expert evidence on value of shares was irrelevant to any of the issues on which the plaintiff succeeded and put the defendant to additional cost to resist those issues. It would be unfair and unreasonable to expect the defendant to pay those costs and I decline them as a cost in the litigation. However, in respect of the claim for $1,639.79 for tolls, photocopying, couriers, postage and stationery, the figure is well within the range to be expected of such litigation and it would be unreasonably onerous to expect the plaintiff to particularise how each component related to the litigation. Such a request should normally only be necessary where the figure falls outside the range normally expected. I do not consider this to be such a case. I also note, for completeness, that the amount claimed for photocopying the Bundle of Documents should be allowed as a disbursement. The fact it was paid to the defendant rather than a third party is not relevant.Costs on the costs applicationI decline to award costs on the costs application. Neither party has achieved sufficient success on the application for costs to treat them as the party who has succeeded.Outcome[50] I award costs as follows:(a) The plaintiff is entitled to 3C costs for each stage of the proceeding (bar the interlocutory application for production of documents where costs were awarded at the time), but these are all to be discounted by 66 per cent.(b) There is no costs award to the defendant.7 Sherman Limited v Harlow [2014] NZHC 1697.(c) Disbursements as sought by the plaintiff are allowed, except for the expert witness invoices totalling $49,579.27.(d) No costs are awarded to either party on making the costs applications.[51] Given the complexity of the costs claims, further queries may arise as to the calculation of costs applying my decision as set out above. I reserve leave to the parties to seek further assistance from the Court if required, as to the calculation of costs in light of the decisions I have made.Solicitors:C S Withnall QC, DunedinWilkinson Rodgers, DunedinR W Raymond, Barrister, ChristchurchAnderson Lloyd, Christchurch