THECIRCLE.CO.NZ LIMITED v TRENDS PUBLISHING INTERNATIONAL LIMITED (IN LIQUIDATION AND IN RECEIVERSHIP) [2021] NZCA 235

THECIRCLE.CO.NZ LIMITED v TRENDS PUBLISHING INTERNATIONAL LIMITED (IN LIQUIDATIONAND IN RECEIVERSHIP) [2021] NZCA 235 [4 June 2021]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA425/2020[2021] NZCA 235BETWEEN THECIRCLE.CO.NZ LIMITEDFirst AppellantDAVID ALAN JOHNSONSecond AppellantAND TRENDS PUBLISHINGINTERNATIONAL LIMITED (INLIQUIDATION AND IN RECEIVERSHIP)First RespondentCALLAGHAN INNOVATIONSecond RespondentHearing: 15 March 2021Court: Clifford, Brewer and Dunningham JJCounsel: R B Hucker and R F Selby for AppellantsD H McLellan QC and A E Ferguson for RespondentsJudgment: 4 June 2021 at 10.45 amJUDGMENT OF THE COURTA The appeal is allowed in part.B The High Court's indemnity costs order is quashed and substituted for anorder of standard scale costs uplifted by 50 per cent. We remit thequantification of those costs to the High Court if the parties are unableto agree.D We make no order as to costs.____________________________________________________________________REASONS OF THE COURT(Given by Clifford J)Introduction[1] In April 2019 Powell J in the High Court at Auckland dismissed a counterclaimby Trends Publishing International Ltd (Trends) for damages of $61 million fromCallaghan Innovation (Callaghan) for breach of contract and statutory duties.1That judgment has not been appealed.[2] At the conclusion of his judgment the Judge found Callaghan was entitledto costs. If these could not be agreed, he would determine the issue after the filingof memoranda.2[3] The parties were unable to agree. Callaghan subsequently requested thatindemnity costs be ordered, not only against Trends, but also against two non-parties:the first and second appellants TheCircle.co.nz Ltd (The Circle) and David Johnson.[4] Callaghan sought costs on an indemnity basis in the sum of $1,020,445.02together with disbursements of $434,212.37, a total of $1,454,657.39. After thededuction of $50,000 security for costs paid by Trends and already released toCallaghan, this resulted in a total claim of $1,404,657.39 for costs and disbursements.3[5] The Judge awarded Callaghan payment of indemnity costs of $1,020,445.02together with disbursements of $303,823.66, and ordered, as Callaghan had sought,that those amounts were payable The Circle and Mr Johnson as non-parties.4 After adeduction of the $50,000 security for costs already paid to Callaghan, this lefta balance of $1,274,268.68 for which judgment was given.51 Trends Publishing International Ltd v Callaghan Innovation [2019] NZHC 907 [Substantivejudgment].2 At [235].3 Trends Publishing International Ltd (in rec and liq) v Callaghan Innovation [2020] NZHC 1626[Costs judgment] at [3].4 At [86].5 At [87].[6] Both Trends and The Circle were owned and controlled by Mr Johnson.The Circle had funded Trends' claim against Callaghan. The Judge concludedMr Johnson's and The Circle's roles in that litigation justified the non-party order.6[7] Trends was placed in receivership and then in liquidation after the April 2019substantive judgment. The liquidators have played no part in this costs dispute.[8] Mr Johnson and The Circle now appeal.Background[9] In 1982 Mr Johnson established, and thereafter successfully expanded, Trendsin his roles as its sole shareholder and director. Trends' business comprisedthe publication in New Zealand and elsewhere of a suite of magazines aimed atthe home ownership and improvement markets. Different magazines targeteddifferent geographic and home market segments. They all featured copy designedto appeal to a wide range of participants in those markets, perhaps most obviouslyretail consumers, and carried related advertising. By 2007, Trends was operating inthe United States of America, Australia, Singapore, Malaysia, Hong Kong, Indonesia,Dubai, China, India and Canada, as well as New Zealand.[10] The growth of online marketing platforms challenged the Trendsbusiness model. In 2012 Trends successfully applied to the then Ministry of Scienceand Innovation (MSI) for a project grant to assist it to digitise its business bymoving it onto what was described as a "global online vertical marketing platform".7[11] Following what Powell J described as the "successful completion" of thatgrant,8 in late 2013 and early 2014 Trends investigated further similar funding.By then, the role MSI had had in the allocation of Crown research and developmentfunding had been transferred to Callaghan. Trends applied to Callaghan for afurther grant.6 At [84]–[85].7 Substantive judgment, above n 1, at [20].8 At [23].[12] In its grant application, Trends described the research and development workit proposed, in very similar terms to those it had used when applying to MSI.The application was successful, and Trends and Callaghan entered into a FundingAgreement for an R&D Growth Grant on 2 April 2014 (the Funding Agreement).In the Funding Agreement that research and development work was referred to asthe "Programme". The Funding Agreement entitled Trends to reimbursement of20 per cent of its expenditure on "Eligible R&D" incurred in carrying outthe Programme up to a maximum of $5 million in each year of the agreement.[13] Trends' first two claims for reimbursement, for the first and second quarterof 2014, were met by Callaghan. When Trends sought reimbursement for the thirdquarter of 2014, Callaghan sought further information from Trends. That informationdid not address Callaghan's concerns. Deloitte New Zealand Ltd were commissionedto investigate in November 2014 and provided its draft report to Callaghanin December 2014. In essence, that report concluded the expenditure for whichreimbursement was claimed by Trends, although similar if not identical to expenditurewhich had been reimbursed under the previous grant from MSI, did not constituteEligible R&D.[14] Matters came to head on 17 December 2014. Callaghan met with Trendsthat day and delivered it a letter suspending the Funding Agreement. At the same timeCallaghan provided Trends with a copy of a press release for issue that day. In additionto announcing the suspension of the Funding Agreement, that press release stated that"[t]he matter has also been referred to the Serious Fraud Office".9[15] The Supreme Court subsequently observed "[t]here can be no doubt that thispress release had an adverse impact on the ability of Trends to continue trading".10[16] Following delivery of Deloitte's final report, in April 2015 Callaghanpurported to cancel the Funding Agreement and demanded repayment of thegrants paid. On 12 May 2015 Trends proposed a compromise with its creditors.119 At [129].10 Trends Publishing International Ltd v Advicewise People Ltd [2018] NZSC 62, [2018] 1 NZLR903 at [12].11 Companies Act 1993, s 228(1).The proposal documents attributed Trends' financial difficulties to the actionsof Callaghan.[17] The compromise was supported by Mr Johnson, The Circle and variousassociated interests who at the time of the meeting controlled more than 75 per cent ofthe creditors' vote by value. The Circle, Trends' landlord, was its largest singlecreditor. The proposal was approved at a creditors' meeting on 22 May 2015.[18] Callaghan, and several other creditors, subsequently applied to the High Courtto have the compromise set aside. In opposing that application Trends commenced itscounterclaim against Callaghan for damages of some $61 million.[19] From 2016 onwards, as Mr Johnson confirmed, The Circle funded Trends'claim against Callaghan.[20] The challenge to the compromise was determined before Trends' counterclaimfor damages. That challenge was successful in the High Court,12 upheld in this Courtin 2017,13 and in the Supreme Court in 2018.14[21] Trends' counterclaim was heard in the High Court in August 2018. In thecourse of the hearing the Judge split that claim between liability and quantum. In his30 April 2019 substantive decision, Powell J found against Trends as regards each ofthe bases upon which Trends said Callaghan had acted unlawfully in suspendingthe grant, announcing that suspension and subsequently terminating the grant.15[22] The Judge reserved the question of costs.16 As already indicated, in hisseparate costs judgment of 10 July 2020 the Judge awarded indemnity costs anddisbursements against Trends totalling $1,274,268.68 (after the deduction of $50,000Trends had paid for security) and ordered that those costs were the joint and severalliability of Trends and the non-parties, The Circle and Mr Johnson.12 Advicewise Ltd v Trends Publishing International Ltd [2016] NZHC 2119.13 Trends Publishing International Ltd v Advicewise People Ltd [2017] NZCA 365, [2017]NZCCLR 7.14 Trends Publishing International Ltd v Advicewise People Ltd, above n 10.15 Substantive judgment, above n 1.16 At [235].Issues on appeal[23] The High Court awarded indemnity costs to Callaghan on the basis that Trends'claim against Callaghan was "fundamentally misconceived or otherwise hopelessfrom conception".17 In doing so the Judge referred to the leading authority onindemnity costs, Bradbury v Westpac Banking Corp,18 and the "hopeless case" testarticulated by French J in the Federal Court of Australia in J Corp Pty Ltd v AustralianBuilders Labourers Federation Union of Works (WA Branch) (No 2).19[24] As regards Callaghan's application for orders against Mr Johnson andThe Circle as non-parties the Judge concluded:[81] It is clear that in the circumstances of this case, Mr Johnson andThe Circle promoted and funded proceedings by an already insolventcompany substantially for their own financial benefit and in consequence areliable for the costs of the claim, which as I have already determined should beon an indemnity basis.[25] In arguing the appeal, Mr Hucker went to considerable lengths to challenge thecorrectness of the Judge's decision to decline all Trends' claims against Callaghan.Whether or not that judgment was correct is not the issue here. This is not an appealagainst the substantive judgment nor, given that, could there be an argument that costsin that dispute as between Trends and Callaghan should not follow the event: the eventbeing Callaghan's success.[26] Rather, the issues in this appeal are those of hopelessness so as to justifyindemnity costs, the quantum of disbursements ordered and the appropriateness ofthe non-party orders. We consider the challenge to the non-party orders first.The non-party orders[27] We are satisfied the Judge was entitled to order that any costs awardedto Callaghan against Trends be payable by the non-parties, Mr Johnson and The Circle.17 Costs judgment, above n 3, at [18].18 Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] 3 NZLR 400 [Bradbury].19 J Corp Pty Ltd v Australian Builders Labourers Federation Union of Workers (WA Branch) (No 2)(1993) 46 IR 301 (FCA) at 303.[28] Mr Hucker challenged that order on the basis that the steps taken inthe litigation were for Trends' corporate benefit, and so the Judge's reliance onthe factors of control and financial interest had been misplaced. The roles played byMr Johnson and The Circle were unremarkable in the context of the commercial realityof closely held company operations in New Zealand.[29] We are not persuaded by that argument. On this issue, it is sufficient for usto endorse the Judge's reasoning:20[82] This was not a simple case of related party advances, nor was thelitigation simply to recover monies to be applied for creditors and shareholdersgenerally. Likewise, by no conceivable stretch of the imagination could theactions of either Trends or the non-parties be considered as falling within theliquidator's exception identified by the Privy Council in Dymocks.21In particular:(a) Until its recent liquidation Trends was under the control ofMr Johnson, who by the time the substantive claim againstCallaghan was heard was Trends' sole director, that Trendswas "a 100 per cent owned by [Mr Johnson], controlled by[him] and his interests".(b) The Circle is likewise under the control and ownership ofMr Johnson.(c) Trends was likely insolvent from some time in 2013 andcertainly by early 2015.(d) The Circle is and has been for a considerable period thelargest creditor of Trends. As of May 2015, at the time theTrends compromise was proposed, the Supreme Court notedThe Circle was owed $3,080,381.80 out of total creditors(including Callaghan and "insider creditors") of$4,343,843.23. Trends' creditors (excluding Callaghan and"insider creditors") amounted to $716,660.33.(e) As early as December 2016, Mr Johnson confirmed thatTrends was not paying for the legal costs in pursuing itscounterclaim against Callaghan:Trends sister company [The Circle] ismeeting all the costs. So pursuing thecounterclaim does not have any effect onTrends' fund available ...20 Costs judgment, above n 3.21 Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2004] UKPC 39, [2005] 1 NZLR 145[Dymocks].[83] As even this brief summary demonstrates, the suggestion thatThe Circle was a mere funder cannot be sustained, nor the argument thatpursuit of the counterclaim against Callaghan was substantially for the benefitof creditors of Trends, let alone that Mr Johnson and/or The Circle were in anyway acting in a similar manner to liquidators.[84] On the contrary, it is clear that the approach taken by Mr Johnson andtogether with The Circle stands in marked contrast to the situation consideredby the Court of Appeal in Kidd v Equity Realty in which a non-party costsorder was found to be inappropriate simply because the director controlled thecompany and the company subsequently became insolvent.22 Instead, it isabundantly clear that in this case the principal potential beneficiaries of thecounterclaim given the quantum sought ($61 million) and the lack of creditorsother than The Circle, were clearly Mr Johnson and The Circle and it isartificial to attempt to draw a distinction between the two. Mr Johnsonthrough his ability to control both Trends and The Circle controlled both thedirection of the litigation and the funding of it, with The Circle willinglyproviding the funds to enable the counterclaim to proceed. This clearly tookthem into the category identified by the Privy Council in Dymocks as non-parties who "promote and fund proceedings by an insolvent company solelyor substantially for [their] own financial benefit" and who "should be liablefor the costs if [their claim] fails".23(Original footnotes omitted.)[30] The real question here is whether, as the Judge concluded, Trends' case againstCallaghan was hopeless from the outset so as to justify the award of indemnity costs.The indemnity costs awardLegal principles[31] Indemnity costs are governed by r 14.6(1)(b) of the High Court Rules 2016.The leading case on indemnity costs is Bradbury v Westpac Banking Corp, wherethis Court distinguished between the three costs scales:24(a) standard scale applies by default where cause is not shown to departfrom it;(b) increased costs may be ordered where there is failure by the payingparty to act reasonably; and(c) indemnity costs may be awarded where that party has behaved eitherbadly or very unreasonably.22 Kidd v Equity Realty (1995) Ltd [2010] NZCA 452.23 Dymocks, above n 21, at [29].24 Bradbury, above n 18, at [27][32] There are several categories of conduct in which indemnity costs havebeen awarded:25(a) the making of allegations of fraud knowing them to be false and themaking of irrelevant allegations of fraud;(b) particular misconduct that causes loss of time to the court and toother parties;(c) commencing or continuing proceedings for some ulterior motive;(d) doing so in wilful disregard of known facts or clearly established law;(e) making allegations which ought never to have been made or undulyprolonging a case by groundless contentions, summarised inFrench J's "hopeless case" test.[33] As regards the "hopeless case" category, this Court has explained:26[17] The reference to French J's "hopeless case" test is to an observationmade by French J (now Chief Justice of Australia) in J Corp Pty Ltd vAustralian Builders Labourers Federation Union of Workers (WA Branch)(No 2) that indemnity costs may be awarded where "a party persists in whatshould on proper consideration be seen as a hopeless case". French J reliedon an earlier decision in which Woodward J said that it was appropriate toconsider awarding indemnity costs "whenever it appears that an action hasbeen commenced or continued in circumstances where the applicant, properlyadvised, should have known that he had no chance of success". Woodward Jadded that such a case must be presumed to have been commenced orcontinued for an ulterior motive or because of some wilful disregard of theknown facts or the clearly established law. In that case the presumed ulteriormotive was to pressure the respondents to settle. The other possibility wasthat the proceeding was pursued for no good purpose at all, due to inertiaand carelessness.[34] The Court went on to note that it is not necessary under this category of conductjustifying indemnity costs that there be flagrant misconduct.27 In Mawhinney vAuckland Council this Court has recently considered, in the context of s 166 of theSenior Courts Act 2016, the threshold concept of proceedings that are "totallywithout merit".28 In doing so the Court relied on English jurisprudence that equates25 At [29], citing Hedley v Kiwi Co-operative Dairies Ltd (2002) 16 PRNZ 694 (HC) at [11]; andColgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225.26 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2014] NZCA 348, (2014) 22PRNZ 322 (footnotes omitted).27 At [27].28 Mawhinney v Auckland Council [2021] NZCA 144.that phrase with the phrases "bound to fail" or, in other words, "hopeless".29 It followsthat the conclusion a case is hopeless so as to justify an award of indemnity costs isnot one that can be based on fine distinctions or complex reasoning. We approach thisappeal accordingly.Analysis[35] Trends sued Callaghan for breach of contract and statutory duties based onthe Funding Agreement. Put simply, it said the expenditure on which it based itsclaims for payment under the Funding Agreement constituted qualified Eligible R&DExpenditure, and in determining otherwise Callaghan had not only breached theexplicit terms of the Funding Agreement, but also failed to comply with statutoryand/or implied duties to act fairly and reasonably. Those duties were said to extend toaccepting claims from Trends for reimbursement of expenditure incurred in carryingout the Programme, as reflected in the background section of the Funding Agreementin the following terms:B. You have applied to Callaghan Innovation for a funding grant to covera portion of the costs of your research and development programme("Programme") for a minimum of 3 years. The Programme isreferred to in the schedule to this Agreement ("Schedule") anddescribed in detail in your application and your research anddevelopment plan ("Application").C. Your Application has been approved, and Callaghan Innovation willprovide the funding specified in the Schedule to enable you to carryout the Programme ("Funding").D. The purpose of this Agreement is to govern the investment of theFunding in the Programme [36] Trends also claimed that the public announcements made on 17 December2014 breached the confidentiality provisions in the Funding Agreement.30[37] In reaching his conclusion that Trends' case was hopeless, the Judge focusedon what he termed Trends' fundamental misconception of the terms of the Funding29 At [50]–[53], citing R (Grace) v Secretary of State for the Home Department [2014] EWCA Civ1091, [2014] 1 WLR 3432.30 We note that Trends also challenged Callaghan's subsequent press release regarding terminationof the Funding Agreement on 21 April 2015 on the same grounds.Agreement and, in particular, as to the type of expenditure for which it was entitled tobe reimbursed by Callaghan. As he put it:31[19] The Funding Agreement is in fact clear that Trends was only ableto seek reimbursement of 20 per cent of eligible research and developmentexpenditure ("Eligible R&D Expenditure"). Despite this, it was clear fromthe evidence that Trends never undertook a formal calculation as to whatportion of its expenditure was Eligible R&D Expenditure entitled to beclaimed under the Funding Agreement. [20] More fundamentally, the evidence, both contemporary and thatproduced at trial by Trends, provided no basis for concluding that any of theexpenditure claimed by Trends was in fact Eligible R&D Expenditure for thepurposes of the Funding Agreement. [38] The Judge went on to support that conclusion by reference to the evidence ofMr Groves, Trends' Financial Controller and Chief Financial Officer. The Judge saidthat evidence had made it clear that in claiming grant monies Mr Groves had neverconsidered whether the amounts being claimed were in fact Eligible R&DExpenditure, nor was there any evidence to suggest they were. Rather, Mr Grovesprovided no explanation as to how he ultimately determined the extent of the labourcommitted to the project nor how it constituted Eligible R&D Expenditure. The Judgenoted that Mr Groves' analysis purported to show all but four of the employees listedwere working 100 per cent on Eligible R&D Expenditure.32[39] The lack of any contemporaneous evidence supporting the claims forreimbursement of Eligible R&D Expenditure was compounded by the unreliability ofthe expert evidence Trends called at trial. As the Judge put it:[28] The lack of any documentary support for the amounts claimed byTrends under the Funding Agreement, let alone that such claims were EligibleR&D Expenditure for the purposes of the Funding Agreement should havebeen blindingly obvious to Trends from the start of the Deloitte investigationand certainly well before the present proceedings were filed. By pursuing theclaim, in terms of Bradbury v Westpac, Trends misconduct was flagrant. As itnever addressed these fundamental issues Trends was unable to show thatCallaghan breached its obligations to Trends when it first suspended and thenterminated the Funding Agreement, noting instead by the time closingsubmissions were presented Trends in fact accepted inaccurate informationhad been provided to Callaghan in breach of clause 10.4(b) of the FundingAgreement. This was in fact the inevitable result of Trends failure to keepsufficient records and led to it claiming monies to which it was not entitled —31 Costs judgment, above n 3 (footnote omitted).32 At [20].the other two breaches of the Funding Agreement (clauses 5.1 and 10.4(c)respectively) for which Callaghan had terminated the Funding Agreement.(Footnotes omitted.)[40] As the Judge had said in his substantive judgment:33[211] The expert evidence Trends relies upon to justify its claims fromDr Milner and Mr Basrur likewise provides no justification for theamounts claimed. Instead, it is fundamentally misconceived. It focusses onwhether Trends was completing the project as set out in the application, ratherthan whether the funding claimed was Eligible R&D Expenditure for thepurposes of the Funding Agreement.[41] We agree with that assessment, save as regards one matter. That is, the possiblesignificance of the fact that Trends' application for grant funding, as recorded in theFunding Agreement, was made on the basis of the Programme described in itsapplication and that was in fact the work which it did carry out. It was not until twoclaims had been made and accepted that Callaghan focused on the question whichdominated the trial, namely whether expenditure incurred in carrying out theProgramme did, in fact, constitute Eligible R&D Expenditure.[42] Significantly, there had been concerns within Callaghan from the outset —that is, before the Funding Agreement was signed — as to the eligibility of Trends'claims; concerns which were not communicated to Trends. The Judge acknowledgedthat matter in his judgment in the following way:[36] In assessing Trends' application, Callaghan took a very narrow viewof what it was required to assess. The majority of those considering theapplication concluded that Callaghan was bound to approve Trends'application if Trends could establish that it met the business eligibility criteriaas a New Zealand business and, as outlined in the Minister's Direction:• have had at least $300,000 in eligible R&D expenditure sourced from non-government funds in each of thetwo most recent years;• have had eligible R&D expenditure of at least1.5 per cent of revenues in each of the two most recentyears;• meet financial and management due diligencerequirements sufficient to justify three years of funding;and33 Substantive judgment, above n 1.• provide Callaghan Innovation with a R&D planincluding an estimate of R&D expenditures over the nextthree years. Businesses must compile the R&D plan to alevel of detail and clarity sufficient to assess progress inthe businesses' R&D programme over time.[37] As a result, Callaghan did not consider the nature of the research anddevelopment proposed to be undertaken by Trends but instead limited itsanalysis to the factors set out in [36] above. Callaghan therefore obtainedauditor's reports with regard to Trends' financial position, as well as astatement from Moore Stephens Markhams confirming Trends' historicalresearch and development expenditure. While this confirmed Trends hadundertaken research and development over a two year period, it did notidentify whether that historical research and development expenditure wasEligible R&D Expenditure for the purposes of the Growth Grant. Indeed,Moore Stephens Markhams confirmed:The Research and Development expenditure disclosed above isrelated to expenditure on research, particularly in areas of gainingunderstanding of marketing opportunities, insight into currentand future users experiences on large scale global platform,established a pathway for the current media to digital transition.Research expenditure it is recognised as expense when it is incurred.(emphasis added)[38] Thus while Callaghan identified some issues around Trends' financialposition, it did not look at what Trends said it was intending to develop, theProject itself. It therefore made no real attempt to understand and/or providefeedback to Trends on what parts of Trends' stated research and developmentprogramme would constitute Eligible R&D Expenditure for the purposes ofthe Growth Grant. The lack of focus on what Trends was actually intendingto do clearly concerned a number of the Callaghan staff tasked with assessingthe application, but ultimately Callaghan concluded it could not decline theapplication. [43] We accept it clearly was hopeless for Trends to try and prove that all theexpenditure on which it had based its claim for grant payments constituted EligibleR&D Expenditure. But we are not necessarily convinced it would have been hopelessfor Trends to argue that, in the circumstances:(a) Callaghan had known or had concerns from the outset as to theeligibility of Trends' claims.(b) It had based its approval of Trends' application on an acceptance thatTrends had incurred Eligible R&D Expenditure in the past when, itcould only be, doing similar work to the Programme.(c) Those matters affected the interpretation of the Funding Agreement andof Trends' entitlements thereunder.[44] Having said that, the focus at trial was very much on Trends' misguided effortto argue what it simply could not prove. The acknowledgement by Trends' counsel inclosing of the fundamental flaws in those arguments re-enforced the Judge'sconclusion. Hence our acceptance of the Judge's conclusion on that part of the case.[45] However, we do not think the Judge, in assessing the hopelessness of Trends'case, considered the significance of the argument Trends made that the publicannouncement on 17 December 2014 breached the confidentiality terms of theFunding Agreement. In his substantive decision the Judge described that claim in thefollowing terms:34[136] Irrespective of whether Callaghan was entitled to suspend the FundingAgreement on 17 December 2014, Trends alleges that the issue of theSuspension Press Release independently breached the Funding Agreement.Trends took issue, in particular, with the information that the suspension hadoccurred after an audit of Trends' funding claims, that there had been aninternal investigation followed by an independent audit, and that the matterhad been referred to the SFO.[137] Trends alleges that it is this breach that has been the cause of massiveand ongoing loss to Trends. In particular, the evidence of both David Johnsonand Andrew Johnson was that the development of Trends' digital platform hadreached a point that Trends was poised to not only realise significant revenuethrough the operation of the platform in its core area of business, but that therewas also considerable potential to market the platform as a package to beutilised by other businesses. Trends' evidence was that there were at least twoinvestor opportunities being pursued at the time of the suspension decisionand that these could not be pursued following the issue of the SuspensionPress Release and its implication, with reference to the SFO, that Trends hadengaged in fraud.[46] The relevant provision of the Funding Agreement read as follows:8. CONFIDENTIALITY8.1 You acknowledge that Callaghan Innovation is required to releaseinformation relating to this Agreement, its investment in theProgramme, the progress of the Programme, and the benefits toNew Zealand from the Programme, from time to time.34 Substantive judgment, above n 1.8.2 You agree that Callaghan Innovation may release the followinginformation relating to this Agreement, the Programme:(a) your name and contact details;(b) the Contract ID;(c) the title of the Programme;(d) the fund from which Funding for the Programme is provided;(e) the relevant sector;(f) the total amount of Funding paid;(g) the total amount of Funding payable over the duration of thisAgreement;(h) the year Funding was approved; and(i) statistics relating to the Programme in aggregated form.8.3 You acknowledge that Callaghan Innovation may release informationrelating to this Agreement to its duly appointed agents and advisors,the Ministry of Business, Innovation, and Employment, andNew Zealand Trade and Enterprise.8.4 Except as provided for in clauses 8.2 and 8.3, Callaghan Innovationwill not release information relating to this Agreement unlessCallaghan Innovation is obliged to release that information under theOfficial Information Act 1982, the Privacy Act 1993, at law, under anyregulation or to provide an answer to any parliamentary questions,meet any parliamentary requirements, or provide information toa Minister.8.5 Callaghan Innovation will advise you if it receives a request under theOfficial Information Act 1982 or the Privacy Act 1993 for anyinformation relating to this Agreement, and will consult with youbefore responding to the request.[47] Responding to Trends' claim based on cl 8, Callaghan argued that, althoughthis was not what the clause said, properly interpreted it applied to informationconfidential to Trends, such as may have been disclosed in the application for the grantand more generally in its dealings with Callaghan. In our view, and correctly,the Judge did not accept that argument. He said it must be the case that informationabout the suspension or termination of the funding by Callaghan was "'informationrelating to this Agreement', as are any steps that have been taken to get to that pointincluding internal investigations and audit or reviews".3535 At [149].[48] The Judge accepted, however, that the reference to the referral to theSerious Fraud Office was not directly related to the funding obtained by Trends and,accordingly, was not "information relating to this Agreement". Thus, whilst thereference to the Serious Fraud Office "appeared somewhat gratuitous", it wasnonetheless information Callaghan could be expected to provide as part of theobligation "to all its stakeholders".36[49] Moreover, and to the extent that the information it disclosed had beeninformation relating to the Agreement, the Judge considered Callaghan's broaderstatutory obligations were relevant, including to act fairly and transparently to ensurecompliance with "the Minister's Direction".37 To explain: in his substantive judgmentthe Judge had explained how the grant scheme administered by Callaghan had beenestablished by a Minister's Direction from the Minister of Science and Innovation.Callaghan was required to follow that direction pursuant to s 112 of the Crown EntitiesAct 2004. That Minister's Direction required Callaghan to develop key processes forvetting and auditing businesses to ensure claimed research and development waslegitimate and to provide claw-back provisions where that was not the case.[50] In addition, the Minister's Direction defined Eligible R&D Expenditure in thefollowing way:Eligible R&D expenditure is defined as those meeting the New ZealandEquivalent to International Account Standard 38 (NZ IAS 38) definition ofresearch and development and expensed under that standard.The NZ IAS 38 definitions of R&D are:• Research is original and planned investigation undertaken with theprospect of gaining new scientific or technical knowledge andunderstanding.• Development is the application of research findings or otherknowledge to a plan or design for the production of new orsubstantially improved materials, devices, products, processes,systems or services before the start of commercial production or use.36 At [150].37 At [152].Clarifying PrincipleIf necessary, when seeking to distinguish R&D from non R&D, the furtheradvice provided by the New Zealand Financial Reporting Standard 13 (NZFRS 13) should be applied:• R&D is distinguished from non-R&D by the presence or absence ofan appreciable element of innovation. If the activity departs fromroutine and breaks new ground it is normally R&D; if it follows anestablished pattern it is normally not R&D.38[51] The Judge reasoned that Callaghan's wider obligations under the CallaghanInnovation Act 2012 and the Minister's Direction provided the context for itsobligations under the Funding Agreement. Reflecting that earlier conclusion, made inthe context of Callaghan's claim for breach of contract and of statutory duties and/orimplied terms, the Judge reasoned:39In such circumstances, it follows that as cl 8.2 authorised Callaghan to releasedetails of the approval of funding it must also be able to release the corollaryof that information, details as to whether the funding has been suspendedor terminated and, in broad terms, the reasons for doing so.[52] As the Judge's reasoning itself shows, it was clearly arguable that Callaghanbreached cl 8 when, without any prior notice to Trends other than at the meetingthe same day, Callaghan made the statements it did on 17 December 2014.That argument can be based squarely on the terms of cl 8.[53] Moreover, given the terms of cl 8, Callaghan's argument that the Minister'sDirection in some way broadened the scope of disclosure allowed by cl 8.4 was notone that was bound to succeed. Clauses 8.2 and 8.3 very specifically described theinformation Callaghan may release "voluntarily", as it were. Callaghan also reservedits ability to perform obligations to release information where it was legally requiredto do so, in response to any Parliamentary questions, to meet any Parliamentaryrequirements or to provide information to a Minister.[54] In our view it was therefore arguable that, by reference to the terms of cl 8.4,cl 8 was a code and was not to be construed more widely, for example by reference toinformation Callaghan could be expected to provide as part of its obligation38 We note the "Clarifying Principle" was not referred to in the Funding Agreement.39 Substantive judgment, above n 1, at [152] (footnote omitted)."to all its stakeholders". The commercial sensitivity of the information involved here,for example that Callaghan was asking for money back because of concerns as tonon-compliance, is obvious.[55] Nor do we consider this to be one of those situations where although a part ofan appellant's case is not hopeless, nevertheless the overall case can be said to fallwithin that category.40 That is because in our view there was an arguable claim fordamages based on breach of cl 8 independent of the hopeless nature of Trends' effortsto prove it had incurred significant qualifying R&D expenditure.[56] In our overall assessment, while the amount of $61 million claimed by Trendssounds more than a little farfetched, we do not think it can be concluded that Trends'claim for the breach of contract based on cl 8 was hopeless. On the basis of thatfinding, we are not satisfied that Trends' case overall was hopeless. It follows thatthe Judge was in error in awarding indemnity costs against Trends.[57] However, we consider that Trends' focus on parts of its argument that werehopeless entitles Callaghan to an uplift from standard scale costs. In our view theappropriate figure for that uplift is 50 per cent of standard scale costs. We base thatassessment balancing the hopeless aspect of the case Trends' brought alongside whatthe Judge acknowledged was the relatively smooth way the proceedings unfolded.Disbursements[58] Mr Johnston and The Circle also challenge the Judge's decision thatdisbursements totalling $303,823.66 were properly payable to Callaghan.41[59] Callaghan originally claimed total disbursements of $434,212.37. Mr Johnsonand The Circle disputed the reasonableness of all but $2,067.40 of that amount.42[60] The Judge:40 As noted in Gillibrand (as trustees of the Chris and Mary Gillibrand Family Trust) v Swanepoel[2018] NZHC 1376 at [12].41 Costs judgment, above n 3, at [71].42 At [53].(a) approved $22,617.41 of disbursements for litigation support;43(b) reduced reimbursement of expert witness costs from $294,354.06 asoriginally claimed to $193,599.05, taking a pragmatic approach to theabsence of meaningful narration in the expert witnesses' invoices;44 and(c) approved in full a total $21,542.06 for expenses incurred with respectto all but one of the various witnesses of fact, but reducing thereimbursement for that one witness by 30 per cent, to $63,986.02, forthe same reason as he reduced the claim for expert witness expenses.45[61] In taking the approach he did, the Judge first concluded that the expert evidencewas necessary. But he acknowledged, the invoices submitted did not providesufficient information to gauge the reasonableness of the fees charged by any of theexperts to Callaghan.[62] He then reasoned:[64] In Auckland Waterfront Development Agency Limited v Mobil OilNew Zealand Limited Katz J faced similar circumstances when dealing withdisbursements claims totalling over $800,000. Her Honour, noting the needfor a structured assessment of reasonableness but lacking the information tocarry it out, elected to take a pragmatic approach to ensure that justice wasdone between the parties and reduced the total expert fees sought by30 per cent to take account of the potential presence of "inefficiencies,duplication, charge out rates at the high end of industry norms, or unjustifieduplifts ...". Her Honour noted that "indeed a 30 per cent reduction is possiblyon the high side" but it was "appropriate to err on the side of caution" as theclaiming party carried the burden of proving reasonableness. A similarapproach was adopted by Gordon J in Sullivan v Wellsford Properties Ltdwhere Her Honour awarded 80 per cent of the disbursements sought.[65] In the current case, in the absence of any meaningful narration on theinvoices themselves or explanation by counsel, it is not possible to concludethat the amounts claimed are reasonable for the purposes of requiring Trendsto pay those sums. Given this position it is necessary to follow a similarapproach to Katz and Gordon JJ noted above in order to take account of thepossibility of inefficiencies, duplication, high charge out rates and unjustified43 At [57]–[58].44 At [66].45 At [70].uplifts. As a result, I reduce the amount claimed for expert witnesses by30 per cent in each case.(Footnotes omitted).[63] On appeal, Mr Johnson and The Circle argue that, given the Judge recognisedthe inadequacy of the details for the disbursements that he reduced by 30 per cent, heshould not in fact have allowed any recovery for those matters.[64] Having conducted the trial, the Judge was well placed to take that approachand make the assessment he did. We see no reason to differ from the conclusionhe reached.Result[65] The appeal is allowed in part.[66] The High Court's indemnity costs order is quashed and substituted for an orderof standard scale costs uplifted by 50 per cent. We remit the quantification of thosecosts to the High Court if the parties are unable to agree.[67] We take the view that neither side has succeeded more than the other inthis appeal. Accordingly, we make no order as to costs.Solicitors:Hucker & Associates, Auckland for AppellantsWilson Harle, Auckland for Respondents