MITSUBISHI MOTORS NEW ZEALAND LIMITED v NEW ZEALAND TRANSPORT ENGINEERING LIMITED [2013] NZHC 3077

MITSUBISHI MOTORS NEW ZEALAND LIMITED v NEW ZEALAND TRANSPORT ENGINEERING LIMITED [2013] NZHC 3077 [20 November 2013]IN THE HIGH COURT OF NEW ZEALANDWELLINGTON REGISTRYCIV-2013-485-1628[2013] NZHC 3077BETWEEN MITSUBISHI MOTORSNEW ZEALAND LIMITEDApplicantAND NEW ZEALAND TRANSPORTENGINEERING LIMITEDRespondentHearing: On the papersJudgment: 20 November 2013JUDGMENT OF WILLIAMS J[1] The applicant, Mitsubishi Motors New Zealand (Mitsubishi) applied to set aside a statutory demand issued by the respondent, New Zealand Transport Engineering Limited (trading as HT Engineering). HT is an engineering firm that manufactures equipment for heavy trucks. The respondent subsequently withdrew the statutory demand. Mitsubishi wants costs.Background[2] This dispute arises out of an agreement between the two parties to jointly display their wares at the New Zealand Transport and Heavy Equipment Expo (theExpo). Mr Davidson (HT Engineering's business development manager) contacted Mr Peryman (Mitsubishi's Sales Development Manager) referring to a trade certification that HT had recently received and asking for a meeting to be set up. Mr Davidson met with Mr Peryman and Mr Martin (Mitsubishi's Key AccountManager) on 23 November 2012 to discuss the possibility of a joint display at the Expo.[3] For HT, Mr Davidson says an agreement was reached whereby HT wouldmanufacture two bodies for two of Mitsubishi's trucks. The combined productswould then be displayed at the Expo. The first truck would be fitted with a curtain- side and tail-lift body (the curtain-side truck) and the second truck would be fitted with a steel tipper body (the tipper truck).[4] It was agreed that if the two complete truck units sold at the Expo, the parties would then discuss the price to be attributed to HT's work. What is in dispute is what the parties agreed would happen if the trucks were not sold at the Expo. Mr Davidson says they agreed that if the trucks did not sell Mitsubishi would sell each truck later as a complete unit. Mr Martin emphasises that Mitsubishi did notagree to buy the bodies from HT, although his affidavit in support of Mitsubishi'sapplication for an order setting aside the statutory demand does not directly refuteMr Davidson's assertion that each truck would be sold only as a complete unit.[5] Emails submitted by both parties shine light on what the parties intended at the time. On 14 January 2013 Mr Davidson emailed Mr Martin to update him on how the manufacture of the two bodies was progressing. Mr Martin replied saying:Thank you for your offer to provide bodies for vehicles to be exhibited at the NZ Truck Show. I must advise that Mitsubishi Motors NZ are not prepared to accept any terms of payment for this project ...We are prepared to joint exhibit however we will not accept any requirement to purchase at completion of the show.[6] Mr Davidson responded saying:Well we have to try. So, given the costs of sites and your kind offer to co share I will assume that to mean I am able to join your people on the floor to promote our product over the duration of the expo.If that is the case, then, we would welcome the opportunity.[7] It appears that the parties were at cross purposes as to what would happen if the trucks did not sell at the Expo. Mr Davidson says he interpreted the emails on 14 January to mean:that there could be no payment unless and until the trucks sold, and that it would be the ultimate purchasers rather than Mitsubishi who would bepaying for them. I certainly did not regard Mr Martin's email ascontemplating that the chassis could be separated from the bodies and sold separately. That would be absurd because each body had to be manufactured specifically for and would become an integral part of the chassis, and because we had agreed at our meeting that the trucks would be sold.[8] Mr Davidson says he phoned Mr Martin on 18 January 2013 and the two men discussed their earlier agreement that the parties would try to sell the modified trucks as complete units at the Expo. According to Mr Davidson, Mr Martin said to him(orally) that in the event that the trucks did not sell at the Expo, "Mitsubishi would arrange for its salespeople to sell the trucks as complete units after the Expo".[9] The Expo took place and neither truck sold. On 25 March 2013, Mr Davidson met with Mr Andrews, the general manager of a Mitsubishi/Fuso truck dealer in Auckland (not Mitsubishi). Mr Andrews asked Mr Davidson to advise the lowest price HT would accept on the sale of the curtain-side truck as a complete unit. HT replied that it would accept $33,000 plus GST. The sale did not proceed. On 4 April 2013 Mr Andrews emailed Mr Davidson to advise that "we will not be proceeding with this body". Mr Davidson emailed Messrs Martin and Peryman saying that this was contrary to HT's agreement with Mitsubishi. Mr Peryman replied saying he was enquiring into the situation.[10] On 1 May 2013 Mr Peryman emailed Mr Davidson saying:As notified we need the cab chassis urgently to supply another deal so we have asked for your [sic] the body to be taken off and stored in the Mitsubishi compound.What are your instructions for the body?We would prefer to send the truck to you to take it off?[11] Mr Davidson replied that day saying:This was never the agreement, we will not accept the body back as it was built particular to that cab chassis and it was agreed HT would be paid once the unit was sold.So in short HT will not release the security recorded on the PPSR against that vehicle until payment is received.Removing the body from the chassis is a decision for MMNZ [Mitsubishi Motors New Zealand].[12] On 22 May 2013 Mr Davidson emailed Messrs Peryman and Martin asking whether Mitsubishi Motors New Zealand had possession of the curtain-side truck. Mr Peryman replied:This truck and curtainsider have been separated.The truck has been sold as a fuel tanker and your curtainsider is safe in our MMNZ storage yard in Wiri.We can arrange transport of your curtainsider back to your premises if you want.[13] Mr Davidson replied to Messrs Martin and Peryman that same day:This is very disappointing. I am left with no option than to hand the file to our Solicitors to pursue the matter as a breach of agreement and breach of the Commerce Act and will further instruct them to issue a statutory demand for payment and for costs.[14] Neither Mr Peryman nor Mr Martin replied to that email. On 27 May 2013, HT emailed an invoice for the curtain-side body. Neither Mr Peryman nor Mr Martin responded to that invoice. On 13 June 2013, HT issued a statutory demand seeking payment of the cost of the curtain-side. Mitsubishi responded on 24 June 2013 by filing an application to set aside the statutory demand.[15] Mitsubishi also sought an order from the Court requiring the return of thetipper truck, which was in the respondent's possession at the time. Mr Martin and Mr Davidson each provide a different version of events in relation to the tipper truck. Mr Martin says HT took the tipper truck on 6 June 2013 to use as a bargaining chip to secure payment for the curtain-side body. Mr Davidson says HT took the truckwith Mr Peryman's permission, in order to provide a quotation. He refers to a seriesof emails between 22 April and 22 May between himself and Mr Peryman. He says HT returned the tipper truck following the issuing of proceedings by Mitsubishi.[16] On 2 July, a conversation took place between counsel for the applicant, Mr Gordon, and Mr Davidson. Mr Gordon and Mr Davidson differ as to thecontents of that conversation. Mr Davidson's version of the conversation is thatMr Gordon suggested to him that the demand had been issued as a tactic and heresponded "you could say that".[17] Mr Gordon ceased acting as the applicant's solicitor after memoranda as tocosts were filed to enable him to file an affidavit recording his version of the conversation:I said to him that the statutory demand was a "clear abuse of process". Itwas in response to this that Mr Davidson refuted what I had said, and said(to me) instead that "it was a tactic" – adding "of course it was"....Mr Davidson also gave me something of a candid explanation of what hemeant by this description... I recorded Mr Davidson's explanation in my filenote as follows – it was: "to make them (MMNZ) negotiate & settle with me.You do these things. Sometimes they back fire. But sometimes they workwell."[18] On 4 July 2013 HT withdrew its statutory demand. In subsequent correspondence HT accepted it was liable to pay some costs. Its offer to pay $2000 in costs was rejected by Mitsubishi and the parties have been unable to reach any agreement on an amount. The matter has now come before the court to determine the appropriate amount of costs payable by HT.Relevant law[19] Any award of costs is at the discretion of the court.1 The court must exercise its discretion in accordance with the general principles listed in r 14.2 of the High Court Rules. The primary principle is that the unsuccessful party should pay costs to the successful party.2 There is a general presumption that a party who discontinues a proceeding will be liable for costs.3 The withdrawal of a statutory demand is commonly equated to a discontinued proceeding.4 In the present case, the defendant elected to discontinue its claim. It was, in my view, wise to do so. The plaintiff is therefore the successful party.[20] Generally, the Court will not consider the merits of the competing contentions unless the merits are so obvious that they should influence the costs1 High Court Rules, r 14.1.2 High Court Rules, r 14.2(a).3 High Court Rules, r 15.23.4 North Shore City Council v Local Government Commission (1995) 9 PRNZ 182 (HC); Furnz Ltd v Goode Industries Ltd HC Auckland CIV-2008-404-001024, 13 October 2008 at [6].issue.5 There needs to be a good reason for departing from the general principle that the party who fails should pay costs to the party who succeeds.6[21] The following principles are relevant to determining costs relating to the withdrawal of a statutory demand:(a) The party who issues a statutory demand needs to have a degree of assurance that there is no reasonable argument against the debt demanded.7(b) The use of a statutory demand for debt collection purposes rather than proving the insolvency of a company is improper.8(c) The issuing of a statutory demand is a very serious matter. The recipient of a statutory demand must act quickly in order to avoid the statutory consequences of failing to comply with the demand.9(d) A company wishing to issue a statutory demand should do so through a solicitor. As an officer of the court, a solicitor has an overriding obligation to evaluate whether in law a demand is sustainable before issuing such a demand.10Submissions[22] Mr Gordon, for the applicant, applies for indemnity or increased costs. Mr Gordon seeks indemnity costs under r 14.6(4)(a) on the basis that the statutory demand was improperly issued. Mr Gordon submits HT used the statutory demand as a debt collection device notwithstanding it had no prospect of success because thedebt was disputed and Mitsubishi was obviously solvent. He also submits HT'staking of the tipper truck increased Mitsubishi's legal costs.5 North Shore City Council v Local Government Commission (1995) 9 PRNZ 182 (HC) at 1866 Gateway Cargo Systems Ltd v Airborne Freight Ltd HC Auckland CIV-2003-404-7207, 16 March 2004 at [7].7 Independent Liquor (NZ) Ltd v Hanssen [2013] NZHC 211 at [24].8 Pirtek Waikato Ltd v Ellison Trading Ltd HC Hamilton M107/99, 10 August 1999 at [8].9 Rembrandt Custodians Ltd v Pro-drill (Auck) Ltd HC Auckland M337-IM03 13 June 2003.10 Ebert Construction Limited v Advanced Windows (2001) 14 PRNZ 681 (HC) at [2].[23] Alternatively, Mr Gordon seeks increased costs under r 14.6(3)(b)(ii) on the basis that HT contributed unnecessarily to the time or expense of this proceeding, by taking or pursuing an argument that lacks merit.[24] Counsel for the respondent, Mr Kerr submits HT acted appropriately and reasonably in issuing the statutory demand and therefore increased or indemnity costs are not warranted. Mr Kerr submits HT believed its right to payment for the curtain-side body was triggered by the sale of the cab chassis and that the applicant's representatives did not dispute HT's communications as to the terms of theagreement or its entitlement to receive payment. Mr Kerr submits HT took legal advice before serving its statutory demand and it acted in the genuine belief that the debt claimed by it was not disputed.[25] Mr Kerr submits the costs otherwise payable by the respondent should be reduced because the applicant contributed unnecessarily to the expense of the proceeding by failing to raise a dispute until after the issue of the statutory demand.Decision[26] The respondent accepts that it must pay costs. The issue for determination is the appropriate amount. The question is whether the court should award indemnity costs or increased costs.Indemnity costs[27] Awards of indemnity costs are exceptional, and require exceptionally bad behaviour.11 The misconduct must be "flagrant".12 New Zealand courts have adopted, as a guide, a categorisation of types of conduct found to have crossed the threshold. The categories of particular relevance to the present case are:13(a) commencing or continuing proceedings for some ulterior motive;11 Bradbury v Westpac Banking Corp [2009] 3 NZLR 400 (CA) at [28].12 Prebble v Awatere Huata (No 2) [2005] 2 NZLR 467 (SC) at [6].13 Bradbury v Westpac Banking Corp [2009] 3 NZLR 400 (CA) at [27].(b) doing so in wilful disregard of known facts or clearly established law; and(c) making allegations which ought never to have been made.[28] In examining whether (c) is made out, the court will ask whether:14(a) at the relevant time, the party knew or ought to have known that their case had no prospect of success; and(b) whether they acted unreasonably by pursuing a wholly unmeritorious and hopeless claim.[29] Consumer Credit Management Limited v Joden Finance Limited is a useful example of the kind of conduct that attracts an award of indemnity costs.15 Joden sent Consumer Credit Management Limited (CCML) a statutory demand seeking payment for work it claimed to have performed for CCML. But there was no contractual relationship that could have given rise to the alleged debt. CCML responded immediately saying that there was no basis for the alleged debt and that if the demand was not immediately withdrawn it would apply to set the demand aside and seek costs on an indemnity basis. Joden re-served its statutory demand. CCML then filed an application to set aside the statutory demand.[30] Joden took legal advice just prior to the hearing of that application. But itwas not until the hearing that it advised that it did not oppose CCML's application.In awarding indemnity costs, Associate Judge Abbot found Joden must have known there was no conceivable basis for the alleged debt, this was a hopeless case and there was merit in the argument that this was a vexatious and opportunistic attempt to compel CCML to pay money it did not owe.[31] In the present case, there was no agreement in writing covering what would happen if the trucks did not sell at the Expo. That situation explains why HT14 At [16]-[17].15 Consumer Credit Management Limited and Joden Finance Limited HC Auckland 2009-404- 1860, 1 April 2010.withdrew its statutory demand and did not take any further action to recover the alleged debt. On the other hand, (and unlike Joden Finance), Mitsubishi responded with silence when HT alleged that selling the cab chassis separately was contrary tothe parties' agreement. When HT asked for an update on the situation three weekslater, Mitsubishi responded that the cab chassis had already been sold separately. It was then that Mr Davidson threatened to issue a statutory demand.[32] But the merits are not all one way here. I agree that there appeared to be no agreement covering the situation the parties faced. But HT was left high and dry with a body designed specifically for the truck unit from which it was eventually separated. Mitsubishi at least owed HT an explanation of its view of its rights before proceeding to separate and sell the truck unit. Both parties opted to use pre-emptive strike strategies – one by selling the truck unit, the other by seizing the tipper truck.That context leads me to conclude that HT's behaviour was not so 'bad' or 'flagrant'in context as to justify indemnity costs.Increased costs[33] Rule 14.6(3)(b)(ii) gives the Court power to order a party to pay increased costs if that party contributed unnecessarily to the time or expense of a proceeding by pursuing an argument which lacks merit. I am satisfied that this is a case for increased costs for two reasons. First, where the proceeding involves a statutory demand, the person issuing a statutory demand must ensure that there is noreasonable argument against the debt demanded. In the present case, HT's case maynot have been utterly devoid of merit but there was certainly a reasonable argument against the debt demanded.[34] Second, it is clear from the circumstances that HT sought to use the statutorydemand as a debt collection device. Even if Mr Davidson's version of theconversation on 2 July is to be preferred (and I am far from convinced that it should be), his email on 22 May indicates that he sought to use the statutory demand for that purpose. Moreover, Mitsubishi could obviously show it was solvent.[35] For the above reasons, I am satisfied that an award of reduced costs or scale costs is not appropriate. Mitsubishi will be entitled to increased costs of 50 per cent.Quantum[36] Mr Gordon says Mitsubishi's costs calculated on a scale 2B basis are $5,970plus disbursements of $592.65. He says Mitsubishi's actual costs are $15,603.30.[37] Mr Kerr submits costs should be granted on a 2A basis. Rule 14.3(1) defines Category 1 proceedings as proceedings of a straightforward nature able to be conducted by counsel considered junior in the High Court. Category 2 proceedings are defined as proceedings of average complexity requiring counsel of skill and experience considered average in the High Court. Generally, band A is appropriate for a relatively straightforward originating application to set aside a statutory demand.16 I am satisfied that band A is appropriate in this case.[38] Mr Kerr submits that Mitsubishi has claimed for a sealing order, when noorder has been or will need to be sealed. I understand Mitsubishi's claim to beanticipatory. Under r 11.11(1) a costs judgment must be sealed. The plaintiff is entitled to costs and disbursements for that step.[39] Mr Kerr also submits Mitsubishi should not be entitled to costs in relation to the costs memorandum because Mitsubishi rejected HT's offer to pay $2000 in costs.Generally claims for costs in relation to costs applications are not ordered.17 A balance must be struck between encouraging unsuccessful litigants not to refuse unreasonably to pay costs while at the same time encouraging successful litigants to approach costs reasonably, to negotiate, and not to make unduly aggressive or premature costs applications.18[40] On 18 July 2013, Mr Kerr sent Mr Gordon a letter forcefully maintaining thatHT's issue of a statutory demand was "entirely reasonable" in the circumstances and16 In Curly Ltd v Harvey Norman Stores (NZ) Pty Ltd HC Auckland M29/02, 24 May 2002.17 Harley v Registrar-General of Land HC Wellington CIV-2009-485-2167, 23 September 2010 at [6]; Bloor v IAG New Zealand HC Rotorua CIV-2004-463-425, 3 February 2011 at [29].18 New Zealand Sports Merchandising Ltd v DSL Logistics Ltd CIV-404-5548, 19 August 2010 at [22]-[26].that "there is sufficient basis in this case to rebut the usual presumption that costs should follow the event". The letter also contained a settlement offer of $2000.Mr Gordon rejected that offer and then requested that Mr Kerr sign a consent memorandum asking the court to determine costs.[41] In my view, Mitsubishi is entitled to costs for the costs memorandum. Mr Kerr's position was unreasonable given that HT sought to use the statutorydemand process for debt collection and that there was a reasonable argument against the existence of the debt. There was little doubt here that costs would not follow the event. The main issue was whether indemnity costs or increased costs were appropriate. The offer of $2000 was therefore much too low. Mr Kerr was thengiven an opportunity to increase HT's offer, which he did not do. In light of these circumstances, Mr Gordon was justified in seeking to have the matter resolved by the court.Conclusion[42] Mitsubishi is entitled to costs on a category 2A basis but increased by 50 per cent. Costs in relation to the costs memorandum and sealing order are granted. The calculations are as follows:filing originating application and supporting affidavit: $1,990.00;+ preparing and filing (consent) memorandum ahead of first mentions hearing: $398.00;+ preparing and filing memorandum on costs: 398.00;+ sealing order or judgment; 398.00;= $3,184.00x 50 per cent= $4,776.00+ 592.65 (disbursements)= $5,368.65.___________________________Williams J