KROMA COLOUR PRINTS LIMITED V TRIDONICATCO NZ LIMITED CA CA598/07

KROMA COLOUR PRINTS LIMITED V TRIDONICATCO NZ LIMITED CA CA598/07 6 June 2008IN THE COURT OF APPEAL OF NEW ZEALAND CA598/07 [2008] NZCA 150BETWEEN KROMA COLOUR PRINTS LIMITED Appellant AND TRIDONICATCO NZ LIMITED Respondent Hearing: 19 May 2008 Court: O'Regan, Priestley and Heath JJ Counsel: H McIntosh for Appellant M S Cole and W J R Kiewik for Respondent Judgment: 6 June 2008 12.30 pmJUDGMENT OF THE COURT A The appeal is allowed. B The High Court costs and disbursements of the parties shall lie where they fell. C Costs shall be paid by the respondent to the appellant in the sum of $3,000 together with the usual disbursements. REASONS OF THE COURT(Given by Priestley J)The Appeal[1] The appellant had sued the respondent in the High Court. It discontinued the proceeding. The respondent sought costs under r 476C of the High Court Rules. In a judgment delivered on 24 October 2007, Andrews J ordered the appellant to pay costs to the respondent. The sole issue raised by this appeal is whether the Judge was correct in law in so ordering.Background[2] The appellant leased commercial premises in Whangarei. In January 2002 a fire broke out in the ceiling of the premises causing extensive damage to the appellant's photo processing business. The appellant considered the cause of the fire was a faulty capacitor which was a part of the fluorescent ceiling lights. [3] The appellant became aware of a trade alert, which had been published some four years earlier in an electrical industry magazine, notifying the industry that a number of production batches of capacitors were faulty. That alert stated that Atco Controls Pty Ltd had received reports of operational failures of capacitors installed in light fittings. After this initial reference to Atco Controls Pty Ltd, all further references were to "Atco". The alert suggested "Atco" be contacted for advice through telephone and facsimile numbers which were the respondent's. Atco Controls Pty Ltd was the Australian company in a group to which the respondent (then named Atco Controls Ltd) belonged. [4] In January 2004, the appellant's solicitors wrote to the respondent claiming compensation for the fire damage. At the same time the appellant, concerned there might be a limitation issue, filed proceedings. The appellant did not notify the respondent of this step. Nor did it serve the respondent till January 2005. Nonetheless correspondence and preliminary discussions took place throughout 2004 and for the first few months in 2005. The respondent did not file its statement of defence until August 2005.[5] The appellant's statement of claim alleged negligent manufacture and supply of capacitors. It unambiguously alleged that the light fittings in the appellant's premises contained capacitors "manufactured by [the respondent]". The statement of claim further alleged that the respondent, other than issuing the trade alert, took no steps to alert the public about a fault in some of its capacitors. [6] The respondent denied it had manufactured the capacitors and pleaded that if the light fittings contained capacitors it denied it had manufactured them. [7] Lists of documents were filed in August and September 2005. The respondent's list contained no reference to any documents consistent with the respondent having manufactured the capacitors. [8] In January 2006 destructive testing of capacitors was carried out by the respondent's experts in Brisbane. In June 2006 a conference involving the parties and their experts took place in Auckland. [9] By July 2006 the appellant finally appreciated the capacitors lying at the centre of its claim were not manufactured by the respondent. Rather they had been manufactured in Australia by Atco Controls Pty Ltd. Despite that, both parties attended a case management conference on 11 July 2006 and sought consent orders which included a direction for a seven day trial to begin in May 2007. [10] Subsequently the appellant acknowledged the respondent was not the manufacturer of the capacitors. [11] Over the next eight months the parties continued to spar on interlocutory matters. The appellant sought leave to join both Atco Controls Pty Limited, now in liquidation, and its insurer as parties. There was a further case management conference. The respondent opposed joinder. An Associate Judge dismissed the appellant's joinder application. The appellant sought review of that decision on an opposed basis. In March 2007 Rodney Hansen J directed the joinder application should be heard. This led to the April 2007 substantive fixture being vacated. The appellant finally discontinued on 4 May 2007.The High Court Decision[12] The Judge correctly stated the law on r 476C. She referred to North Shore City Council v Local Government Commission (1995) 9 PRNZ 182, noting that the presumption in favour of awarding costs to a defendant against whom a proceeding had been discontinued may be displaced if there were just and equitable circumstances not to apply it. A court would not speculate on respective strengths and weaknesses of the parties' cases. The reasonableness of the stance of both parties, however, had to be considered. She also referred to Oggi Advertising Limited v McKenzie (1998) 12 PRNZ 535 which recognised that the discretion reposing in r 46 could override the general principles relating to discontinuance. [13] The Judge noted the appellant's submission that the respondent had failed to avoid unnecessary steps that would waste costs and that its litigation stance had been for an ulterior purpose. [14] The Judge accepted the respondent's submission that the appellant's pleading constituted an unequivocal allegation the respondent had manufactured the capacitors. The respondent had pleaded a clear denial which should have caused the appellant to give careful thought to the issue of manufacture, which it had to prove. The Judge considered there was no evidence to support the appellant's submission that the respondent's defence of the proceeding had been driven by an ulterior purpose. Concluding that the respondent had acted reasonably in defending the proceeding, the Judge considered that there were no just and equitable grounds to avoid the r 476C presumption.Discussion[15] Mr McIntosh accepted that in June 2006 the appellant had become aware that, for the purposes of a negligent manufacturing claim, it had the wrong defendant. It also became aware that there were two similar proceedings in the High Court afoot against the respondent, involving the same solicitor and counsel, alleging fire damage flowing from capacitors manufactured by the respondent.[16] Mr McIntosh's major complaint, although he did not use these words, was that the appellant had been led up the garden path by the respondent. Instead of revealing at an early stage it was not it, but Atco Controls Pty Ltd, which had manufactured the capacitors, the respondent invited discussion and settlement negotiations when it was well aware, so far as it was concerned, there was no valid claim it could possibly settle. [17] Mr McIntosh accepted the appellant had kept the proceeding alive for many months after discovering it had the wrong defendant. It was of the view that a joinder of the Australian company was a sensible option; that the relevant insurer might also properly be the subject of joinder; and that there was a faint prospect that amended pleadings might sheet home liability against the respondent in respect of obligations it might have had to New Zealand customers to whom it might have supplied capacitors. [18] Counsel pointed out with some force that although the appellant was well aware, between July 2006 and April 2007, it had no tenable claim against the respondent for negligent manufacture, the respondent for its part had vigorously resisted joinder. Mr McIntosh, however, accepted the appellant's claim for costs during that period was problematic. [19] Mr Cole's submissions resisted, and properly so, the contention that the respondent's pleading had been misleading. The appellant's allegation that the respondent had manufactured defective capacitors was denied, not barely, but explicitly. There was nothing in the 1998 trade alert which would justify a conclusion that the respondent was the relevant manufacturer. [20] In counsel's submissions the respondent was perfectly entitled to explore matters of evidence and experts' reports with the appellant, particularly since, on the instructions of Mr Cole's clients, it was far from clear whether the fire in the appellant's premises and other fires in other proceedings had been caused by faulty capacitors. The respondent, despite its knowledge that it was not vulnerable to the negligent manufacturing allegations, was entitled to explore issues of causation in the context of the proceeding.[21] Mr Cole candidly accepted that he was acting for the Australian manufacturer (now in liquidation) and its insurers in this and other proceedings. [22] It is apparent from this focused narrative that both parties, at various stages and for different reasons, kept the proceeding alive for partisan purposes. The respondent for its part, secure in the knowledge it was not the manufacturer, as it had fairly and explicitly pleaded, was concerned to examine matters of evidence and causation. The appellant, although aware that its statement of claim contained a fundamental error, was content to leave a fixture afoot and explore issues of joinder. [23] This was not the basis on which the Judge approached the discretionary exercise inherent in r 476C which provides:476C CostsUnless the defendant otherwise agrees or the Court otherwise orders, a plaintiff who discontinues a proceeding against a defendant must pay costs to the defendant of and incidental to the proceeding up to and including the discontinuance.[24] Her approach was thus:[18] As to the submission that the defendant's continued defence of the proceeding was an abuse of process, it was, in my view, appropriate for it to do so. The plaintiff was continuing to prosecute its claim, and the defendant was pursuing at least two defences, the first being that it did not manufacture the capacitors, the second being that in any event, the origin and cause of the fire was not a light fitting containing a faulty capacitor. [19] The plaintiff's further submission that the defendant's continued defence of the proceeding was for an ulterior purpose, that of assisting Atco Controls Pty Ltd and its insurers, appears to be based solely on a statement of belief in an affidavit sworn by a solicitor acting for the plaintiff. No evidence is given to support the solicitor's belief. I accept that the statement is pure speculation, and cannot be relied on to prove an improper motive on the part of the defendant.[25] The reference which the Judge correctly held to be speculative, was an affidavit from a solicitor who was the litigation manager of the appellant's insurers deposing he believed the respondent's defence was pursued "in order to assist [the insurers] and/or Atco Controls Pty Limited to avoid liability." The Judge held this statement to be "pure speculation" and not a reliable basis on which to prove "an improper motive" on the part of the respondent (at [19]).[26] Were that the only focus, the Judge would be correct. But the litigation history as a whole needed consideration. At many steps along the way both parties had adopted stances which could be criticised. The appellant's primary allegation (above at [5]) was itself questionable given the information contained in the trade alert and the undisputed evidence that the capacitors found after the fire were emblazoned with a kangaroo and words denoting Australian manufacture. The respondent's statement of defence denial (above at [6]) was more than a bare denial and ought to have given the appellant cause to pause. [27] The lengthy period of time for which the respondent adopted a stance suggesting it was amenable to settlement, including forensic examinations, conferences, and exploration of causation issues, would be inexplicable were the respondent's interests alone involved. [28] The choice of the appellant to hold on to the fixture once the scales had fallen from its eyes and embark on a joinder application was risky given the fatal flaw now apparent in its cause of action. [29] None of these matters were considered or weighed by the Judge. Our view is they ought to have been weighed. They were matters extending well beyond the narrow focus of whether the respondent's motivation was ulterior or improper. They were matters relevant to the reasonableness of the parties' respective stances. The focus adopted by the Judge prevented her from considering and weighing matters highly relevant to whether it was just and equitable to displace the r 476C presumption. [30] We drew the inference from the respondent's litigation stance that it took a number of steps designed to benefit Atco Controls Pty Ltd and its insurers which had no benefit at all to the respondent against whom liability could not be sheeted home. Mr Cole was unable to suggest an alternative inference. In our view the respondent's litigation stance displaces the r 476C presumption.[31] Nor, given the appellant's litigation stand which we have outlined, and its failure to act earlier on discovering its fundamental error, do we consider there was a basis to award costs in the appellant's favour.Result[32] In our judgment and for the above reasons, the appeal must be allowed. The 24 October 2007 order of Andrews J that the appellant pay the respondent costs on discontinuance is set aside. Costs and disbursements on the substantive proceeding in the High Court shall lie where they fall.Costs[33] The appellant has succeeded. It is entitled to costs on this appeal in the sum of $3,000 and the usual disbursements.Solicitors: Russell McVeagh, Wellington for Appellant Simpson Grierson, Auckland for Respondent