MARAC FINANCE LTD v VERO LIABILITY INSURANCE LTD [2014] NZHC 1974

MARAC FINANCE LTD v VERO LIABILITY INSURANCE LTD [2014] NZHC 1974 [20 August 2014]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2011-404-003346[2014] NZHC 1974BETWEEN MARAC FINANCE LIMITEDPlaintiffAND VERO LIABILITY INSURANCELIMITEDDefendantHearing: 19 June 2014Appearances: R J Hollyman and T P Mullins for PlaintiffC T Walker for DefendantJudgment: 20 August 2014JUDGMENT OF COURTNEY JThis judgment was delivered by Justice Courtneyon 20 August 2014 at 3.30 pmpursuant to R 11.5 of the High Court RulesRegistrar / Deputy RegistrarDate..Introduction[1] In a previous judgment I held that Marac Finance Ltd had suffered losses from unauthorised lending by one of its senior managers for which it was entitled to be indemnified under the Commercial Crime policy it held with Vero Liability Insurance Ltd.1 In this judgment I determine the quantum of that indemnity. The issue turns on the effect of an endorsement to the policy that limited indemnity to the period after 8 February 2006.[2] There had been unauthorised advances for some time before 8 February 2006 but an endorsement to the policy meant that Vero was only liable to indemnify for losses sustained after 8 February 2006. However, the borrower repaid more after 8 February 2006 than Marac advanced. Marac maintains that the repayments made after that date should be treated as repaying the advances outstanding at the start of that period. If that is right the indemnifiable loss will exceed the sum insured of $1m. But Vero contends that the repayments are to be treated as only reducing advances made after 8 February 2006. If that is right Marac there will not have suffered any indemnifiable loss.[3] This issue raises the following questions:(a) Did the endorsement require the loss to be calculated only by reference to the advances and repayments made after 8 February 2006?(b) Was the account under which the advances were made operated as acurrent account to which the rule in Clayton's case applied or did eachadvance correspond to a particular repayment?[4] There is also an application by Marac for indemnity costs. In my earlierjudgment I held that Vero's refusal to appoint an investigative specialist was a breach of the policy and Marac's loss was its legal costs in the proceedings. After Idelivered my decision I became aware of the line of authority indicating that, in1 Marac Finance Ltd v Vero Liability Insurance Ltd [2013] NZHC 2525, [2014] 2 NZLR 93.general, litigation costs are not recoverable as damages.2 I raised this with counsel at the second hearing; the point had not yet been identified by Vero in the notice of appeal already filed in respect of my first judgment. Mr Hollyman accepted that, ultimately, Marac could not recover its legal costs as damages and indicated that Marac would instead make a claim for indemnity costs under r 14.6 of the High Court Rules.Has Marac sustained a loss for which it is indemnified?The circumstances of the claim[5] In 2000 Marac began lending to a motor vehicle dealer, Rapson Holdings Ltd, under a dealer floorplan facility known as a Wholesale Business Facility (WBF) (the 115352 account). This type of facility is commonly referred to as a revolving credit facility. By February 2002 Rapson owed Marac $6.870m, which it could not repay. A senior Marac executive, Grant Atkinson, became involved in the Rapson account in 2002 and was given the responsibility for overseeing the recovery, subject to the oversight of the Credit Committee.[6] On the evidence given at the first hearing I found that by mid to late 2003 Marac had determined that no further revolving credit facilities were to be extended. Further finance was to be available to Rapson only on the basis of back-to-back letters of credit. These would fund only pre-sold cars so that Marac would be exposed for only a very short time.[7] In October 2003, however, a new facility was established, the 464768 account. It was shown in Marac's internal accounting system, Sovereign, as a WBF.Mr Atkinson was instrumental in setting up the 464768 account. It was notauthorised by Marac's Board or Credit Committee and Mr Atkinson never reportedto the Board or the Credit Committee on it. Between 2003 and 2009 Mr Atkinson made numerous advances to Rapson under the 464768 account.2 Simpson v Walker [2012] NZCA 191, (2012) 28 FRNZ 815; Chick v Blackwell [2003] NZHC 1525.[8] In early 2010 Marac discovered the unauthorised advances and claimed under its Commercial Crime policy. The policy provided cover for financial loss sustained as a result of dishonest acts by an employee committed with the clear intent of causing loss to Marac. I held that there was a loss to Marac each time Mr Atkinson made an unauthorised advance and that he had the requisite dishonest intent from mid-2005 onwards.The policy[9] Under the policy the maximum indemnity was $1m for "any one loss and in the aggregate". The operative clause provided that:The Insurer shall indemnify the Insured for their direct financial Losssustained at any time consequent upon the single act or series of related acts of dishonesty committed by any Employee which is(i) Committed with the clear intent to cause the Insured a Loss and(ii) Discovered by the Insured during the Policy Period – [10] "Loss" was defined as: the direct financial Loss sustained by the Insured in connection with any single act or series of related, continuous or repeated acts (shall betreated as a single act) of dishonesty committed by any Employee.[11] I found that each advance made from about mid-2005 was a dishonest act that gave rise to a separate loss for the purposes of the operative clause. However, although the operative clause did not limit when the dishonest acts or loss had to occur, endorsement 4 meant that Vero was not liable to indemnify for losses sustained as a result of acts committed more than 48 months prior to the date of discovery.3 The date of discovery was 8 February 2010.4 So Vero was not liable to indemnify in respect of advances made before 8 February 2006.[12] Endorsement 4 provided that:3 Endorsement 4 was added in December 2008, effective 30 December 2008.4 This was actually the date of Marac's claim form; the evidence indicated that discovery wassometime (unspecified) in January or early February 2010 but the parties treated 8 February 2010 as the date of discovery. Nothing turns on the difference.It is noted and agreed that the Insurer shall not indemnify the Insured for any Loss sustained at any time consequent upon a single act or series of related acts of Theft, Fraud, Dishonesty or Criminal Damage committed more than 48 months prior to Discovery of the Loss.[13] Cover was also limited by specific exclusions, including exclusion 4.1, which provided that Vero was not liable to pay for:Indirect or consequential loss of any nature, including the loss of income (including but not limited to interest and dividends) not realised by theInsured or any other person or organisation because of a Loss covered under this policy, except as provided under extension 3.6.[14] The effect of exclusion 4.1 was ameliorated by extension 3.6 which wrote back some indemnity for loss of interest:Cover is extended to include an amount in respect of any interest actually lost or owed by the Insured directly in respect of a Loss covered by this policy, provided that the Insurer's liability:(a) For such interest receivable or payable is calculated by applying theaverage of the Reserve Bank of New Zealand's base rate in forcebetween the time of sustaining such Loss and the date of Discoveryof such Loss; and(b) Is limited to 10% (ten per cent) of the limit of liability specified under Item 4 of the schedule and such amount is part of and not in addition to the Limit of Liability.[15] Two issues arise on which there is disagreement between the parties but which I am not required to resolve. The expert witnesses differed as to the interest rate to be used to calculate indemnity under extension 3.6. However, they agreed that if Marac can show an indemnifiable loss under the operative clause the maximum indemnity of $100,000 will be reached whichever rate is used.[16] Secondly, a deductible of $100,000 applied for "each and every Loss". Theparties differed on whether the deductible would apply to each unauthorised advance or only once, to the aggregate loss. However, they agreed that it makes no difference to the outcome; if Marac's approach on the main issue prevails the loss will exceedthe maximum sum insured by a margin that can accommodate the deductible even ifapplied to each advance. If Vero's approach prevails, Marac it will be unable toprove an indemnifiable loss even if the deductible is only applied once. As a result I do not need to consider the deductible.The function of endorsement 4[17] Mr Walker, for Vero, submitted that the operative clause and the endorsement should be read together with the effect that indemnity was only ever available for loss arising from acts done within the 48 month period specified by the endorsement. On that basis Mr Hagen, the expert witness called by Vero, considered that only transactions within the 48-month period could be considered when calculating a loss under the policy. This would mean that repayments made after 8 February 2006 could be applied only to advances made after that date and not to the amount that Rapson owed on 8 February 2006 as a result of previous advances.[18] The critical part of Mr Hagen's reasoning was:I believe that the application of the so-called Clayton's principle is inapplicable within the terms of the policy More generally, it seems to me contrary to the normal approach to assessing loss to say that a lender which has advanced funds which have immediately been repaid to it has suffered loss as a result of that transaction, merely because the payee had accumulated earlier outstanding debts.[19] I find, however, that this does not reflect the policy. I have already noted that the operative clause does not limit the time when loss can occur for the purposes ofthe policy. The operative clause is the insurer's essential promise to its insured andcontains inherent limitations that define the nature of the cover. That basic promise is typically limited by exclusion clauses and, sometimes, extended through extensions. Cover can be further modified by endorsements which may impose either additional limitations or extensions. However, an endorsement would not usually alter or replace the basic promise contained in the operative clause.[20] Altering the scope of the cover provided in the operative clause is a matter that one would expect to see conveyed explicitly and in language consistent with the operative clause. But endorsement 4 stated that "all other terms and conditions remain unaltered", suggesting that the parties did not intend to alter the basicpromise of indemnity, save to the extent specifically provided for.[21] Further, the language of endorsement 4 is very much the language of an exclusion clause. An operative clause is invariably couched in positive language,reflecting the fact that it is a promise to indemnify. In comparison, exclusions are invariably couched in negative language, reflecting their function of reducing the ambit of the operative clause. The wording of endorsement 4 is couched as an exclusion clause; it is a statement that the insurer will not cover a particular kind of loss (loss sustained consequent upon dishonest acts committed more than 48 months before the discovery of the loss). This wording leads me to conclude that endorsement 4 was intended to operate as an additional exclusion clause and should be applied as such.[22] My conclusion is consistent with the approach that Cooper J took inAuckland District Law Society v D A Constable Syndicate 386 in the context of an endorsement providing that underwriters would not be liable to indemnify against claims arising out of certain activities.5 Cooper J rejected an argument that would have seen the indemnity clause read down as a consequence of the endorsement, observing that:6I do not see why or how claims not within the ambit of the Endorsement and which would otherwise fall within the words of the indemnity clause could be excluded from cover on the basis of the words used in the Endorsement.[23] That approach was specifically affirmed on appeal.7How should Marac's indemnifiable loss be calculated?[24] Treating endorsement 4 as an exclusion means that the correct approach tocalculating Marac's loss is to identify the direct financial loss in accordance with the operative clause (i.e. all advances made after mid-2005) and deduct that part of the loss excluded by the endorsement (i.e. advances made before 8 February 2006). The balance is covered. But endorsement 4 says nothing about whether repayments are to be applied to advances made before 8 February 2006; the answer to that depends on how the 464768 account operated.5 Auckland District Law Society Inc v D A Constable Syndicate 386 (2009) 15 ANZ Insurance Cases 61-784.6 At [97].7 D A Constable Syndicate 386 v Auckland District Law Society Inc (2010) 16 ANZ Insurance Cases 61-850; [2010] NZCA 237 at [42].[25] Following substantial write-offs from the original floorplan facility, Marac transferred a balance of $526,951.94 to a new recovery account, 20042610. Rapson made direct payments to this account and by May 2005 it had a zero balance. Semi- regular payments continued to be made to that account until May 2008, when recorded transactions ceased. The 464768 account opened in October 2003 with an advance of $207,737.99. The balance varied, peaking at $4.8m in September 2005.[26] As at 8 February 2006 the balance was $3,633,300.07 (comprising advances, interest and penalties). Between 8 February 2006 and 8 February 2010 Marac advanced $14,713,504.97 under this account. During the same period Rapson repaid $16,084,947.32. Of those repayments, $415,000 was paid to the 20042610 recovery account. A substantial proportion of these repayments were funded by advances from Marac, though to the extent that Rapson was selling cars at (presumably) more than cost, some repayments must have been funded from trade.[27] Mr Hollyman argued that the 464768 account was in the nature of a current account with repayments being credited against the earliest advances, applying therule in Clayton's case.8 The rule in Clayton's case is that, on a current account,payments into the account are treated as discharging the oldest debts. That rule is now accepted as being based on the presumed intention of the parties and liable to be displaced by evidence that shows a different practice as between the parties.9[28] Mr Walker argued that the rule in Clayton's case was displaced in this casebecause the advances were made to support letters of credit that funded specific vehicles. Thus, payments were intended to be, and were, credited against debts owed in respect of specific vehicles rather than simply being credited against existing older debt.[29] Mr Walker relied on the evidence of a Marac staff member, Mr Hershbergerwho said that, at Mr Atkinson's request, he kept a record of what cars were beingfunded by which letters of credit and made an attempt to relate payments back to the8 Devaynes v Noble (1816) 1 Mer 572, (1816) 35 ER 781.9 Re Registered Securities Ltd [1991] 1 NZLR 545 (CA).relevant advance. Mr Walker also pointed to spreadsheets maintained during the relevant period that recorded payments against specific vehicles.[30] Notwithstanding Mr Hershberger's attempts, it was not possible to relate allthe repayments back to specific advances. In any event, the records Mr Hershbergerkept were not part of Marac's accounting system. When the 464768 account wasestablished the Board had determined that a facility of this type would not be provided. It had authorised only the issuing of back-to-back letters of credit. But the evidence was clear that letters of credit were not generally being issued on a back-to- back basis. The 464786 account was shown in the Sovereign system as a WBF and advances made in relation to letters of credit were simply drawn down under the WBF facility and treated as advances made under that facility.[31] The Sovereign printout produced at trial that recorded all activity on the 464768 account from October 2003 showed the account being managed as a running balance with repayments applied against the existing balance i.e. applied in reduction of the oldest debts first.[32] The evidence showed that Mr Atkinson himself treated the account as a WBF. For example, in an email dated 15 December 2004 to Marac staff member, Charissa Stark, Mr Atkinson said:I note that both Rapson WBFs are scheduled to mature shortly. Could you please extend both to 31/12/05 on Sovereign.[33] When cross-examined about the nature of the facility he had referred to in the email Mr Atkinson said:A: WBF loan type has a term and if it matures or the date exceeds that term expiry date you have to re-write the loan so this is being a revolvingcredit, so that that process didn't need to occur that, you know, internally in the system, you extended the term for a further period so you didn't have a manual or re-processing of the loan, if you like, within the system so you could maintain the same account number.Q: So this was a revolving credit account being operated for Rapson?A: Yes, oh, when I was referring to that, yes it was I'm referring to a term loan which is for a specific term and gets paid down over time and endversus a revolving credit facility which one of these, WBF relates to which has no definite repayment pattern or term.[34] Mr Atkinson's description of the 464768 account as a revolving credit account was consistent with the current account nature of floorplan funding offered by Marac to its motor vehicle dealer customers. It was described in a contemporaneous internal manual as a facility that:Basically works as an overdraft/revolving credit. Marac holds a general security deed over the dealership. The dealer can draw down and repay as long as it is within its credit limit. The dealership is audited every few weeks by Marac to ensure the credit balance is less or equal to the value of vehicles they have on their lot (if it is we will require the shortfall immediately).[35] At trial Marac's former general manager/consumer, Christopher Flood,described floor plan lending as: a practice where Marac lends a motor vehicle dealer money to finance the purchase of new motor vehicles. Usually the process is that the motor vehicle dealer applies to Marac for a loan facility for this purpose and an agreement is reached whereby a loan is extended for a certain amount of money. The terms of this loan will be such that the borrower can draw and repay money within the facility limit established, provided the dealer has'scaled security' to an equal or greater amount than the loan.Floor plan security is usually taken over the vehicles which the dealer holds in stock through a debenture/general security agreement, together with guarantees and other collateral securities. The dealer is required to repay the loan as stock is sold to customers to ensure that Marac always holdssufficient 'scaled security' to cover the total advances.(emphasis added)[36] The terms on which Marac and Rapson had previously traded under the original WBF also have some circumstantial value because the 464768 account operated in the same way as the parties had agreed Rapson's original WBF wouldoperate. Under the original facility that Rapson entered into on 6 September 2000, condition 4.6 provided that:All moneys paid hereunder shall be applied first towards any Default interest due, secondly towards the interest due for the periods since the previous Payment Date (or the Availability Date if there is no previous Payment Date) and then towards reduction of the Credit.[37] "Credit" was defined as meaning:The total moneys expended by the Lender pursuant to these presents including but without in any way limiting the generality of the foregoing moneys expended by the Lender to the Dealer and money disbursed from the Facility Account to or for the benefit of the Dealer less any moneys repaid by the Dealer.[38] Finally, Mr Walker acknowledged that repayments of $494,975.87 made between 8 and 27 February 2006 could not properly be treated as applying to losses in the period after 8 February 2006 because they pre-dated any advance made during that period. He viewed this as unimportant because even taking those payments out, the repayments during the relevant period still exceeded advances. However, it is significant because it highlights the artificiality of treating repayments after 8 February 2006 as referable only to the advances made after that date.[39] These pieces of evidence combine to satisfy me that the nature of the 464768 account was a revolving credit facility in which there was no particular pattern in terms of advances or repayments save that repayments would be applied in reduction of the earliest advances (and accrued interest or penalties). Had Mr Atkinson managed the Rapson account as the Board had decided he should, advances would have only been made under letters of credit on a back-to-back basis. It was Mr Atkinson who extended the nature of the relationship to a WBF account and I am satisfied that it was fully understood and intended that monies received by Marac would be applied in reduction of the oldest advances. As a result, the circumstances fall within the scope of the rule in Clayton's case and repayments to Marac byRapson after 8 February 2006 are to be treated as being applied first against the balance of $3.336m existing as at that date. The result is that Marac sustained losses after 8 February 2006 in excess of $1m.[40] Before I turn to consider the issue of costs I record Mr Walker's submission that at [121] of my earlier judgment I made a specific finding that Marac's existinglosses as at 8 February 2006 were not to be taken into account in calculating Marac's loss under the policy. That is not correct. I was speaking there about Vero'sargument (no longer pursued) that Marac could not prove any idemnifiable loss because the existing losses as at 8 February 2006 were such that Marac could never have recovered them from Rapson and therefore Mr Atkinson's conduct after thatdate could not have caused any loss.10 My focus was on loss resulting from advances, not on the significance of repayments by Rapson. Indeed, the significance of repayments was barely touched on in argument.CostsIndemnity costs[41] Notwithstanding Marac's effective abandonment of the second cause ofaction, its success on the first cause of action entitles it to costs from Vero in accordance with the general principles set out at r 14.2 of the High Court Rules. However, Marac seeks indemnity costs, which are provided for in the circumstances specified by r 14.6(4):(a) The party has acted vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing or defending a proceeding or a step in a proceeding; or(b) The party has ignored or disobeyed an order or direction of the Court or breached an undertaking given to the Court or another party; or(c) Costs are payable from a fund, the party claiming costs is a necessary party to the proceeding affecting the fund and the party claiming costs has acted reasonably in the proceeding; or(d) The person in whose favour the order of costs is made was not a party to the proceeding and has acted reasonably in relation to it; or(e) The party claiming costs is entitled to indemnity costs under a contract or deed; 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.[42] Mr Walker submitted that the grounds (a) – (d) do not apply and I agree. In particular, I make no criticism of Vero for putting in issue the question whether MrAtkinson's conduct satisfied the operative clause. There was no New Zealandauthority on the critical point regarding the test for clear intent, little United Kingdom or Canadian authority and the American authorities were inconsistent.10 Marac Finance Ltd v Vero Liability Insurance Ltd, above n 1, at [113].[43] Nor, with one exception, do I consider that (e) applies. That exception is the provision under condition 5.9(c) which requires the insurer to pay the expense of the investigative specialist. In a case such as this the investigative specialist would have been a loss adjuster specialising in this type of claim or a forensic accountant. It wasVero's responsibility to approve the appointment of an appropriate person and meet the costs of that person investigating the facts and determining quantum. Its refusal to do so meant that Marac had to incur the costs of the forensic accountant eventually engaged for that purpose. Marac is entitled to be fully indemnified for that cost.[44] This leaves Mr Hollyman's submission that indemnity costs are appropriateunder (f), there being some other reason that justifies such an order. Mr Hollymansubmitted that Vero's refusal to submit the dispute to arbitration justifies indemnity costs. Under condition 5.10 Vero was required, if requested by Marac, to submit the dispute to arbitration if, following the completion of the investigative process provided for by condition 5.9, the parties could not agree on settlement of the claim:After a joint review of the Investigator's report, if the Policy holder cannot agree upon the settlement of Loss the Insurer at the Policy holder's request,will submit the dispute to arbitration. The arbitration panel shall consist of an arbitrator selected by the Policy holder and one selected by the Insurer, with a third independent arbitrator selected by the first two arbitrators. The cost of arbitration will be paid by the Insurer and will be in addition to the Limited Liability. The Insured and the Insurer agree to abide by the outcome of the arbitration, which shall be conducted according to the legal rules govering commercial arbitration in the jurisdiction in which the Policyis issued. The Insured and the Insurer shall enter into an appropriate form of arbitration contract to this effect.[45] In late 2010 Marac's solicitors proposed arbitration of the dispute with asingle arbitrator rather than a three-member panel as provided for by condition 5.10.There appears not to have been a response to that proposal and in early 2011 Marac'ssolicitors sought to have an investigative specialist appointed under condition 5.9 ofthe policy. Vero's response, conveyed by its solicitors, was that the dispute was not suitable for resolution by an investigative specialist and that if Marac wished to pursue its claim and was not interested in the (unspecified) alternatives that Vero had proposed it would need to issue proceedings. I have already found that Vero'srefusal to appoint an investigative specialist was a breach of condition 5.9. Its refusal to submit the dispute to arbitration was a breach of condition 5.10.[46] Indemnity costs under r 14.6(4) have been described by the Court of Appealas costs that "depart from the predictability of the Rules Committee's regime, are exceptional and require exceptionally bad behaviour".11 That statement drew uponthe Court's decision in Kuwait Asia Bank v National Mutual and the SupremeCourt's decision in Prebble v Awatere Huata. In the former, Cooke P said:12 the guiding principle has been that, except where there is special reasonfor awarding costs on a solicitor and client basis, orders should be limited toa reasonable contribution towards the successful party's costs on a party and party basis. This principle is represented in the prescribed scales and has been followed for many years.It reflects the philosophy that litigation is often an uncertain process in which the unsuccessful party has not acted unreasonably and should not be penalised by having to bear the full party and party costs of his adversary as well as his own solicitor and client costs. If a party has acted unreasonably, for instance by pursuing a wholly unmeritorious and hopeless case or defence – a more liberal award may well be made in the discretion of the judge, but there is no invariable practice.[47] In delivering the judgment in Prebble, Elias CJ observed that while this approach continues to be applied, with legislative approval in the form of setting ofscales for recovery, "the general approach yields where it does not deliver a just result".[48] In submitting that Vero's refusal to submit to arbitration justified indemnitycosts under r 14.6(f), Mr Hollyman relied on a line of English cases in which indemnity costs were awarded for breaches of arbitration clauses on the ground that to do otherwise would be fundamentally unjust, having regard to the rule precluding a party claiming costs as damages. In A v B (No 2) Colman J awarded indemnity costs against a plaintiff after the defendants had obtained an order staying proceedings brought in breach of an arbitration agreement.13 Colman J considered that if an applicant on a successful application for stay or injunction for breach of an arbitration or jurisdiction clause can show that the breach has caused it to reasonably incur legal costs those costs should normally be recoverable on an indemnity basis:1411 Bradbury v Westpac Banking Corporation [2009] 3 NZLR 400 at [28], [2009] NZCA 234.12 Kuwait Asia Bank v National Mutual [1991] 3 NZLR 457 at 460.13 A v B (No 2) [2007] EWHC 54.14 At [9] – [15].Thus, if a costs order in favour of a successful applicant for a stay or for an anti-suit injunction directed to giving effect to an arbitration agreement or an English jurisdiction clause must, save in exceptional cases, be confined to costs on a standard basis, there would necessarily be a part of the successfulapplicant's costs of the application which it had properly incurred but could not recover by such an order because of the restrictive process of assessment. This unindemnified portion of costs could then be a loss which could only be recovered as damages for breach of the jurisdiction or arbitration agreement if such a damages claim were permissible. Where the cause of action for relief enforcing the agreement by stay or injunction in the English court and the cause of action for damages for breach of that agreement are, as they normally will be, the same, the effect of those authorities such as Berry v British Transport Commission will be to prevent separate proceedings fordamages by reference to unrecovered costs, notwithstanding the breach of the arbitrational jurisdiction agreement.This would give rise to a fundamentally unjust situation. There can be no question but that the procedural consequence of conduct by a party to an arbitrational jurisdiction agreement which amounts to a breach of it and causes the opposite party reasonably to incur legal costs ought to be that the innocent party recovers by a costs order and/or an award of damages thewhole, and not merely part, of its reasonable legal costs The conduct of a party who deliberately ignores an arbitrational jurisdiction clause so as to derive from its own breach of contract an unjustifiable procedural advantage is in substance acting in a manner which not only constitutes a breach of contract but misuses the judicial facility offered by the English courts or a foreign court. In the ordinary way it can thereforenormally be characterised as so serious a departure from "the norm" as torequire judicial discouragement by a more stringent means than an order for costs on the standard basis.[49] There is no New Zealand case dealing with the appropriateness of indemnity costs in the context of a refusal to submit to arbitration in breach of an arbitration clause. The question must be whether such conduct is sufficiently bad to justify indemnity costs. Mr Walker submitted that it is not. He pointed out that there was no financial loss to Marac as a result of litigating rather than arbitrating becausecondition 5.10 only required Vero to meet the "costs of the arbitration" which would generally be taken to mean the arbitrator's fee only so that Marac would still have incurred its own legal fees.[50] This argument overlooks that fact that the benefits offered by an arbitration clause are not only financial. The policy that Vero offered was directed specifically towards commercial entities that are exposed to risk from within. The circumstances in which such losses occur are typically ones that commercial entities are concernedto keep out of the public arena. Arbitration clauses provide the mechanism for resolving disputes in a way that protects against this concern.[51] There is, however, a significant difference between the circumstances of the present case and A v B. The latter concerned costs awarded on a stay application. The rationale was that it would be unjust not to award indemnity costs because the defendants had no other means of enforcing the obligation and had no remedy in relation to the costs incurred because its only loss was costs, which could not be recovered under the general principle that costs cannot be recovered as damages.[52] In this case, however, Marac was not forced to incur the costs of this litigation; it chose to litigate even though it could have taken steps to enforcecondition 5.10. A party in Marac's position has a remedy under the rules containedin schedule 1 of the Arbitration Act 1996; art 11 (4) provides for a party faced with a failure to act in accordance with the appointment procedure in the arbitration agreement to request the High Court to make the necessary appointment. Article 25(b)-(c) permits the arbitrator(s) to proceed if one party fails to appear at the arbitration. So although Vero was in breach of its obligation, Marac was not powerless. As a result I am not persuaded that this is a case that should be treated as comparable with A v B or that Vero's breach of its contractual obligation justifiesindemnity costs.Costs on a 2B basis[53] Costs should be payable to Marac on a 2B basis, subject to the following.[54] Mr Walker submitted that there are a number of steps which Marac ought not to be allowed to claim for. These are providing further particulars of its claim, providing a supplementary affidavit of documents, the adjournment of the firstfixture date, the cost of one witness' (Mr Jolliffe) business class airfare back to New Zealand, internal "time spent" costs and the unparticularised travel charges for another witness (Ms Darby). I am satisfied with Mr Hollyman's response on thesematters and allow costs in respect of them.[55] Nor, Mr Walker submitted, should Marac be able to claim the costs associatedwith the quantum trial given Marac's failure to prove quantum at the original trial. Iaccept this submission. This was a case which should not have needed another hearing. I allowed it because, had Vero fulfilled its contractual obligation under condition 5.9, a suitably qualified person would have applied his or her mind to the issue of quantifying the claim at an earlier stage, thereby avoiding the cost to both parties. However, it was an indulgence. Costs on the quantum hearing, with the exception of Mr Jordan's costs (which I have already indicated are to be met byVero) are to lie where they fall.[56] Marac is, however, entitled to costs in relation to the memorandum filed on the costs issue.Result[57] I have concluded that, in calculating Marac's loss under the policy, repayments made after 8 February 2006 are to be treated as reducing the balance thatexisted at that date. As a result Marac's loss exceeded the sum insured of $1m and itis entitled to indemnity for that amount. I am also satisfied that Marac would have been entitled to recover up to the $100k sublimit, but for the overall sum insured of $1m. There is judgment in Marac's favour for $1m.[58] Marac is entitled to interest on that figure at the Judicature Act rate of 5 per cent from the date of the proceedings being issued.[59] As to costs:(a) Marac is entitled to costs on a 2B basis and its reasonable disbursements in respect of the liability trial;(b) Costs relating to the quantum trial are to lie where they fall save that Marac is entitled to recover Mr Jordan's costs;(c) Marac is entitled to costs in relation to the costs memoranda on a 2B basis.[60] Leave is reserved to seek further directions if counsel cannot agree on the necessary calculations.____________________P Courtney J