HIRA BHANA & CO LIMITED V PGG WRIGHTSON LIMITED CA CA203/06

HIRA BHANA & CO LIMITED V PGG WRIGHTSON LIMITED CA CA203/06 9 August 2007IN THE COURT OF APPEAL OF NEW ZEALAND CA203/06 [2007] NZCA 342BETWEEN HIRA BHANA & CO LIMITED Appellant AND PGG WRIGHTSON LIMITED Respondent Hearing: 19 July 2007 Court: Chambers, O'Regan and Wilson JJ Counsel: N W Ingram QC and G D Stringer for Appellant C H Toogood QC and J W S Baigent for Respondent Judgment: 9 August 2007 at 3 pmJUDGMENT OF THE COURT A The appeal is dismissed. B The appellant must pay costs of $3,000 plus usual disbursements. We do not certify for second counsel. REASONS OF THE COURT(Given by O'Regan J)Introduction[1] This is an appeal against a costs judgment of Keane J, in which he awarded costs in favour of the appellant, Hira Bhana & Co Ltd, on a Band 2B – 2C basis, but declined Hira Bhana's claim for indemnity costs or increased costs: PGG Wrightson Limited v Wai Shing Ltd & Anor HC AK CIV 2003-404-6579 25 August 2006.Issues[2] The respondent (to which we will refer as "Fruitfed", which is the name of the relevant trading division of the respondent) commenced proceedings against both Wai Shing Ltd and Hira Bhana in late 2003, and the matter went to trial in late 2005. [3] In August 2004, Hira Bhana sent a letter containing a settlement offer to Fruitfed, which was expressed to be "without prejudice save as to costs". The offer was that Fruitfed should discontinue its proceeding against Hira Bhana, on the basis that each party would bear its own costs up to that date. The offer was not accepted. Fruitfed was unsuccessful at trial. Hira Bhana sought indemnity costs or increased costs which, as noted above, the High Court Judge refused. [4] The question for determination is whether increased or indemnity costs should have been awarded. On our view of the case, the answer to that question turns on another question: was it unreasonable for Fruitfed to reject Hira Bhana's offer and go to trial? [5] To answer those questions, we will first outline the background to Fruitfed's action, and the outcome at trial. We will then consider Hira Bhana's offer, and the reasons why it was not accepted. Once we have dealt with those factual issues, we will consider the application of the law, namely the relevant parts of Rules 46 – 48G of the High Court Rules, to the facts.Factual background[6] Fruitfed was the victim of fraud by its Pukekohe branch manager, Mr Dark. Mr Dark had sold items of stock at less than retail price (and, in some cases, at less than cost price) to Hira Bhana and Wai Shing, both of which were market gardeners at Pukekohe and major customers of the Fruitfed horticultural supplies business. Many sales were involved over an extended period. The allegation at trial against Hira Bhana was that it was, or should have been, on notice as to Mr Dark's dishonesty when it received the stock. [7] Fruitfed brought two types of claim against Hira Bhana: one (for $549,561) in debt in reliance on Fruitfed computer invoices, and one (for $675,776) in conversion, knowing receipt and quantum valebat in reliance on manual invoices Mr Dark created to override computer invoices. Hira Bhana defended the claims successfully, saying that it had no reason to disbelieve Mr Dark's authority to agree prices different than those invoiced, or to issue manual invoices. Further, Hira Bhana was successful in establishing a set-off and counterclaim in respect of stock "borrowed" by Fruitfed from Hira Bhana that was not replaced ($73,458), and money received by Fruitfed from Hira Bhana for pre-paid supplies which were never delivered ($87,678). [8] Mr Dark died in December 2002. Fruitfed's investigations into its accounts were at that point underway. However, Fruitfed's records were in a state of disarray. On 21 February 2003 Hira Bhana's accountant sent to Fruitfed a full reconciliation statement in respect of the amounts claimed by Fruitfed. Fruitfed issued proceedings in November 2003. Substantial discovery was made in April 2004, including discovery of a letter signed by Mr Dark substantiating Hira Bhana's counterclaims and acknowledging Hira Bhana's account with Fruitfed was up to date as at 31 October 2002. [9] On 6 August 2004, Hira Bhana's solicitors sent Fruitfed's solicitors a letter stated to be "WITHOUT PREJUDICE SAVE AS TO COSTS". The letter was purportedly made pursuant to r 48G of the Rules and was stated to be a Calderbank letter. The letter said:Our client's offer is that your client discontinues its proceedings against our client, and that each party bears their own legal costs incurred to date. If this offer is not accepted, we confirm that we will produce this correspondence at the conclusion of these proceedings to seek costs in excess of the scale provided in the Second Schedule of the High Court Rules, and the costs that we seek will be on an indemnity basis. The factual and legal basis for our offer is as follows:- 1. It is your client's case against ours that:- (a) It received product at such low prices from your client that it should have on notice that Mr Dark did not have authority to sell it for those prices. (b) That our client has received other product for which it has not paid for at all. 2. It is our client's position that your client cannot succeed against our client for the following reasons:- (1) Our client has paid the amount that it contracted to pay to your client and has not received product for which it has not paid. (2) Mr Dark had the full authority of your client, there was nothing in his dealings which would have put our client on notice that he did not have authority to sell for the agreed price. (3) There will be considerable evidence given with respect to the prices that your client was able to obtain the product for. (4) Our client will produce evidence of a course of dealings with other suppliers that indicates that the market was very competitive and that considerable discounts on product were always being offered to growers. (5) We will produce evidence that other growers were treated in the same way by Mr Dark, and that he contracted with them to supply product at a certain price. (6) Our client raised these issues with your head office and requested action. There was no action taken by your client. In addition, there are serious concerns as to the systems that your client had in place with respect to its stock levels, invoicing, computer systems, stocktakes and audits. Our client will be filing a pleading of contributory negligence against your client.[10] At [12] of his judgment, Keane J remarked that Hira Bhana's offer letter had forecast why the Judge himself was not persuaded by Fruitfed's case at trial and had awarded a sum to Hira Bhana on its counterclaim.The Rules framework[11] The rule dealing with Calderbank offers is r 48G, which, at the relevant time, provided:48G Written offers "without prejudice save as to costs"(1) A party to a proceeding may at any time make to any other party to that proceeding a written offer that— (a) is expressly stated to be without prejudice except as to costs; and (b) relates to an issue in the proceeding. (2) The fact that such an offer has been made must not be communicated to the Court until the question of costs falls to be decided. (3) The effect (if any) that the making of an offer has on the question of costs is at the discretion of the Court.[12] Since 1 November 2004, r 48G has been reworded slightly, and r 48G(3) has been deleted and replaced by r 48GA, which provides in greater detail for the implications of settlement offers that are rejected. [13] Hira Bhana's claim for increased and indemnity costs engages r 48C. The relevant parts of this rule provide:48C Increased costs and indemnity costs(1) Despite rules 47 to 48B, 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, and witness expenses reasonably incurred by a party (indemnity costs). (3) The Court may order a party to pay increased costs if— (b) The party opposing costs has contributed unnecessarily to the time or expense of the proceeding or step in the proceeding by— (v) failing, without reasonable justification, to accept an offer of settlement whether in the form of an offer under rule 48G or some other offer to settle or dispose of the proceeding; 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. (4) The Court may order a party to pay indemnity costs if— (a) the party has acted vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing, or defending a proceeding or a step in a proceeding; or (f) some other reason exists which justifies the Court making an order for indemnity costs despite the principle that the determination of costs should be predictable and expeditious.[14] Under r 48C(3)(b)(v) a failure to accept a settlement offer made under r 46G provides a ground for ordering increased costs. However it is not expressed as a ground for an award of indemnity costs.Hira Bhana's costs claim in the High Court[15] In the High Court, Hira Bhana claimed indemnity costs on the basis that its settlement offer had been rejected, and the consequence stated in that offer of rejection was a claim for indemnity costs. Keane J rejected this claim for three reasons, namely: (a) Hira Bhana's offer was not an offer to settle, but rather a denial of liability and invitation to abandon the claim at a time when Hira Bhana's costs were relatively insignificant; (b) Hira Bhana's offer was made early in the case before battle lines were clearly drawn. Although extensive discovery had been made, therewas later further discovery and interrogatories. The case developed, and the offer was not made again; (c) No other factor justified indemnity costs. In particular, the honesty of Hira Bhana's principals (and also of Wai Shing's principals) had been an issue from the start. The potential scale and complexity of the case was known yet, just before the sending of the Hira Bhana offer, the parties had agreed that the appropriate cost categories were 2B – 2C. [16] Keane J pointed out that indemnity costs could be given only if justified under r 48C(4). Putting aside the Hira Bhana offer, he concluded that Fruitfed had not acted vexatiously, frivolously, improperly or unnecessarily in commencing or continuing its action. Although he had found Fruitfed's case unsustainable, he could not say that it was "so barren that Fruitfed ought, before or during trial, to have abandoned it". He also rejected the application for increased costs. [17] In this Court, counsel for Hira Bhana, Dr Ingram QC, took issue with a number of the Judge's findings. In particular, he said the Judge was wrong to discount Hira Bhana's offer because it was a denial of liability, rather than an offer to make a payment in settlement of the claim, incorrectly discounted the Hira Bhana offer because it was made too early in the proceedings and wrongly failed to exercise his discretion under r 48C(3) or (4) to award increased costs or indemnity costs.Our approach to the case[18] The case was argued before the High Court on the basis that indemnity costs were sought, with increased costs being a fallback position. In this Court, the claim for increased costs took greater prominence and we will deal with it first.Increased costs[19] An order of increased costs could only have been made in this case on the basis outlined in r 48C(3)(b)(v): failure to accept Hira Bhana's offer "withoutreasonable justification". It was clear that Keane J did not believe that it was unreasonable for Fruitfed to proceed to trial: see his comment recorded at [16] above. [20] Dr Ingram argued that Keane J was wrong, and that it was unreasonable for Fruitfed not to accept Hira Bhana's offer. [21] In evaluating this issue, the context of Fruitfed's claim must be borne in mind. Mr Dark had acted fraudulently. Fruitfed's records were unreliable. Even where Fruitfed had computer records, these had, at least in some instances, been overridden by manual invoices created by Mr Dark. [22] Counsel for Fruitfed, Mr Toogood QC, accepted that early disclosure of relevant documentation had been made by Hira Bhana. He acknowledged that much of this documentation was accepted by Fruitfed as accurate or, at least, that Fruitfed was not in a position to dispute it. However, he said that the key issue in the case was the state of knowledge of Hira Bhana's witnesses. Hira Bhana was receiving product at well below normal prices. Fruitfed endeavoured to persuade the Judge to infer that Hira Bhana's principals knew or ought to have known that Mr Dark was not authorised to provide product at such hugely discounted prices or, in some cases, for no charge. He said that this could only be ascertained after cross-examination of Hira Bhana's witnesses, and pointed to the extensive cross-examination that actually occurred at trial. [23] Mr Toogood said that the case for Fruitfed depended on its contention that inferences of such knowledge could be drawn from the circumstances in which the dealings between Fruitfed and Hira Bhana occurred. He highlighted the following factors: (a) Manual invoices were issued by Mr Dark, which disclosed the supply of goods for no charge or at very heavy discounts. Fruitfed's argument was that experienced operators such as Hira Bhana would have known that these prices were untenable;(b) A stark example of this was the supply of sewing machines to Hira Bhana by Fruitfed, for which Mr Dark issued manual invoices following which computer invoices for much greater sums were issued by Fruitfed. For example, in relation to the first supply, the manual invoice recorded the price for the sewing machine as $8,700 plus GST, but the computer invoice recorded a price of $24,050 plus GST. The computer invoices were addressed to Hira Bhana at a post office box which was not that of Hira Bhana, but rather one which Mr Dark had acquired. However the computer invoices were delivered personally, so Hira Bhana was aware of them. Fruitfed asked the Judge to infer knowledge from this train of events, but the Judge declined to do so; (c) There were also three manual invoices in respect of which Hira Bhana made payments by cheques made out to cash, which they handed to Mr Dark. The Judge described these as coming "closest to compromising [Hira Bhana] and to establishing the implicit basis for Fruitfed's case". Fruitfed said the payment of these invoices by cash cheques was explicable only as "kickbacks". However the Judge accepted that the relevant Hira Bhana principals thought the cash payments were made because the stock was being sold "for the benefit of the Pukekohe branch staff social fund", which is what Mr Dark had told them. [24] We accept Mr Toogood's submission that Fruitfed had to put these allegations to Hira Bhana's witnesses in cross-examination to provide a basis for the inferences which it asked the Judge to draw. The fact that the Judge declined to do so does not make it unreasonable for Fruitfed to have proceeded in this manner. In circumstances where credibility of witnesses is a crucial factor in a case, it is not unreasonable to proceed to trial unless that challenge to the credibility is, of itself, vexatious or frivolous. [25] Dr Ingram accepted that the matters highlighted above were credibility issues, and that these were important aspects of the case. He acknowledged that theywere not matters which were dealt with in the Hira Bhana offer because, of course, the allegations had not at that time been put to Hira Bhana. However, he said that Hira Bhana knew that it was not wrong, and the Hira Bhana offer was the only way it could limit its costs exposure. In that respect he relied on the decision of this Court in Moore v McNabb (2005) 18 PRNZ 127 at [55] where the purpose of Calderbank letters is expressed to be a means of allowing litigants to limit their exposure to the potentially very high cost of litigation. He said that, as noted in Moore v McNabb, a defendant cannot choose not to participate in litigation, and therefore must have the means of protecting itself against costs by making an offer to settle or otherwise meeting the claim. He said that is what had happened in this case. [26] We do not disagree with Moore v McNabb as to the purpose of Calderbank letters. But where the nature of the offer made is simply a "walk away" proposition, made early in the proceedings, it cannot be the case that the mere fact that the party which rejected the offer subsequently loses means that party is required to pay indemnity costs or increased costs. If that were so, it would mean that the costs regime set out in rr 46 – 48G would be effectively bypassed in almost all cases where the defendant succeeds, because defendants would routinely make "walk away" offers of the kind made in this case, and then claim indemnity costs if they subsequently succeed at trial. [27] In our view, there is no requirement to go beyond the wording of r 48C(3)(b)(v) in assessing the claim for increased costs. For the reasons set out above, we agree with Keane J that it was not unreasonable for Fruitfed to proceed to trial in this case. That being the case, there is no proper basis to award increased costs against Fruitfed. [28] Much of Dr Ingram's argument focused on whether the Hira Bhana offer was a Calderbank offer for the purposes of r 48G. We do not need to decide this because r 48C(3)(b)(v) refers to both Calderbank offers (i.e. offers under r 46G) and other offers to settle, so nothing turns on the issue. The important point for present purposes is that it was not unreasonable for Fruitfed to decline the offer, given the terms of the offer and the nature of Fruitfed's case.Indemnity costs[29] The case for an award of indemnity costs is even weaker. Such an award must, in our view, be founded on r 48C(4), the relevant parts of which are reproduced at [13] above. In circumstances where there is no reason to make an award of increased costs, it is hard to say that there is a reason justifying an award of indemnity costs. That rules out the "some other reason" ground in r 48C(4)(f). The only other basis for an award of indemnity costs in the circumstances of this case would be under the ground described in r 48C(4)(a) which could apply if Fruitfed's actions in taking the case to trial were vexatious, frivolous, improper or unnecessary. We are satisfied that they were not. In that regard, we agree with the analysis of Keane J.Result[30] We agree with Keane J that an award of indemnity costs or increased costs was not justified in the circumstances of this case. We therefore dismiss the appeal. [31] We award costs of $3,000 plus usual disbursements to Fruitfed. Fruitfed was represented by two counsel on this appeal, but given the relatively confined issues we do not believe it is appropriate to certify for second counsel.Solicitors: Webb Morice, Pukekohe for Appellant Simpson Grierson, Auckland for Respondent