RICHARD ZHAO LAWYERS LTD v FAMILY COURT AT AUCKLAND & ANOR [2017] NZCA 6 [10 February 2017]

RICHARD ZHAO LAWYERS LTD v FAMILY COURT AT AUCKLAND & ANOR [2017] NZCA 6 [10 February 2017]IN THE COURT OF APPEAL OF NEW ZEALANDCA502/2015[2017] NZCA 6BETWEEN RICHARD ZHAO LAWYERS LIMITEDFirst AppellantRICHARD ZHAOSecond AppellantAND THE FAMILY COURT AT AUCKLANDFirst RespondentJIE PING CHENSecond RespondentCA293/2016BETWEEN RICHARD ZHAO LAWYERS LIMITEDAppellantAND JIE PING CHENRespondentHearing: 29 September 2016Court: Winkelmann, Brewer and Toogood JJCounsel: F C Deliu for AppellantsRespondent Family Court at Auckland abidesP F Chambers for Respondent ChenJudgment: 10 February 2017 at 3.30 pmJUDGMENT OF THE COURTA The appeals are dismissed.B The appellants must pay the respondent Chen costs for each appeal as for a standard appeal on a band A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Brewer J)Introduction[1] The appellants appeal against:(a) the quantum of a costs order made by Asher J in their favour in the High Court at Auckland;1 and(b) three decisions of Associate Judge Bell dismissing a bankruptcy application against Ms Chen,2 refusing to recall his judgment in light of fresh evidence,3 and granting costs.4[2] We heard the appeals together on the application of the appellants because the application to bankrupt Ms Chen was made in reliance upon Asher J's costs order.Justice Asher's judgments[3] Justice Asher dealt with an application by Mr Zhao for judicial review of four decisions of the Family Court at Auckland.5 Mr Zhao is a director of Richard Zhao Lawyers Ltd. Mr Zhao had acted for Ms Chen in a relationship property matter. In that capacity he gave an undertaking to hold sale proceeds until the division of relationship property was resolved. He also claimed a lien for costs.[4] Ms Chen dispensed with Mr Zhao's services and discord arose. Ms Chen complained to the New Zealand Law Society. Mr Deliu was involved on the part of Mr Zhao.1 Richard Zhao Lawyers Ltd v Family Court at Auckland [2015] NZHC 1837 [Asher J costs decision] at [10].2 Richard Zhao Lawyers Ltd v Chen [2016] NZHC 1134 [Bankruptcy decision] at [18].3 Richard Zhao Lawyers Ltd v Chen HC Auckland CIV-2016-404-397, 10 June 2016 (Recall minute) at [3].4 Richard Zhao Lawyers Ltd v Chen HC Auckland CIV-2015-404-2086, 16 June 2016 (Costs minute) at [5].5 Richard Zhao Lawyers Ltd v Family Court at Auckland [2015] NZHC 983, [2015] NZAR 1038 [Asher J substantive decision].[5] On 23 December 2014 Judge Burns in the Family Court directed Richard Zhao Lawyers Ltd to transfer the funds held pursuant to Mr Zhao's undertaking toanother firm of lawyers. Mr Zhao did not comply. The judgment was sealed. On 5 March 2015 Judge Burns issued a minute on an application that Richard Zhao Lawyers Ltd be held in contempt. On 10 March 2015 Judge Burns issued a further minute confirming that the contempt hearing would proceed and that Mr Zhao must appear.[6] The applications for judicial review related to the above events.[7] Justice Asher concluded that Mr Zhao should have been given an opportunity to be heard by Judge Burns before the Judge made his decision of 23 December 2014.6 That was because Mr Zhao claimed a lien over the funds in respect of unpaid costs and had also given an undertaking to hold the funds. There was therefore a breach of the audi alteram partem rule and a breach of natural justice.7[8] The three additional applications for judicial review related to the decisionsflowing from Judge Burns' decision of 23 December 2014. They, perforce, could not stand.[9] Justice Asher also included in his judgment a later decision of Judge Burns delivered on 23 April 2015 in which he held Mr Zhao to be in contempt of court and referred his conduct to the New Zealand Law Society. It was accepted that this decision, because it also lay downstream from the decision of 23 December 2014, must also be quashed.8[10] There was, finally, the issue of what should be done with the money held by Mr Zhao pursuant to his undertaking and in reliance on his lien. Justice Asher noted that if Mr Zhao retained security for the fees that he claimed of $13,402.25 and was released from his undertaking, he would have no objection to the balance of the6 Asher J substantive decision, above n 5, at [37].7 At [41].8 At [51].funds being paid to Ms Chen's new lawyers.9 Counsel agreed that Asher J could direct that $94,274.84 be paid to Ms Chen's lawyers.10[11] On 5 August 2015 Asher J gave his judgment on costs. He had previouslyreceived extensive submissions from both parties. Justice Asher's approach toassessing costs can be taken from the following passages:11[5] It is true as Mr Deliu has pointed out that costs reflect how the parties acted during the litigation and not before it. However, I do not acceptthat the background to the proceedings can never be relevant. In PaperReclaim the Court of Appeal said it was wrong to take into accountpre-litigation conduct as a specific factor in assessing costs. It did not saythat the reasonableness of conduct during litigation is to be assessed in avacuum detached from the context of events leading up to litigation.It would be unrealistic to ignore context in certain cases, especially when (ashere) the issue is the extent to which the outcome of the proceeding can beseen as a practical solution, and the effect that should have on costs.That can only be assessed by considering what the parties could havereasonably achieved outside the litigation context.[6] Here the underlying quarrel was that Ms [Chen] sought to obtain the release of monies to which she was entitled (save for the lien and undertaking) and plainly needed. That was her motivation for seeking the impugned orders from the Family Court. Due to errors on the part of both sides, as outlined in my judgment, the release of the monies was plagued by a procedural tangle. Although procedural errors are not relevant in a strictsense in judicial review proceedings such as these, I take the view that thebackground tangle left Ms Chen with little alternative but to oppose theproceedings. If she had not done so, given the unbending position (at thatstage) of Mr Zhao, the result would have been the monies to which she wasentitled could have been tied up indefinitely. Having regard to thatbackground Ms Chen acted reasonably in electing to defend the proceeding.[12] Justice Asher made a modest order for costs in Mr Zhao's favour of $4,000,inclusive of disbursements.12 He did so observing that while he could not ignore the success of Mr Zhao, neither could he ignore the merit of Ms Chen's claim to haveher monies released to her.13 The latter had been recognised by counsel and a practical compromise was reached which led to the direction that $94,274.84 be paid to Ms Chen's new lawyers.9 At [52].10 At [53].11 Asher J costs decision, above n 1 (footnotes omitted).12 At [10].13 At [9].The appellants' challenge[13] Mr Deliu's submissions on behalf of the appellants can be summarised as follows:(a) The appellants succeeded in their claims for judicial review: costs should follow the event.(b) The agreement to pay money to Ms Chen was a pragmatic solution to the underlying dispute and was negotiated by counsel. It was not part of the claims for judicial review.(c) Justice Asher should not have taken into account the pre-litigation conduct of the parties. However, to the extent the Judge was entitled to do so, he should have concluded that Mr Zhao was sinned against greatly by Ms Chen and by the Family Court.(d) The High Court Rules acknowledge that the award of costs is discretionary, but the discretion is fettered by the Rules. Justice Asher appears to have chosen $4,000 as an appropriate award of costs without giving reasons related to the accepted principles.Discussion[14] Justice Asher had to determine costs against a background of proceedings inthe Family Court which were, as his Honour put it, "plagued by a procedural tangle".14 Justice Asher plainly considered that with proper compromise the High Court litigation would have been unnecessary. The Judge's task was to assesscosts in accordance with the background and the High Court Rules. The issue in this appeal is whether in the exercise of his discretion he reached a result which was open to him.1514 At [6].15 DM Roberts Ltd v Mudgway [2013] NZCA 187 at [66].[15] Pre-litigation conduct of the parties is not per se to be the subject of costs decisions. But here the claims brought were for judicial review of decisions made by the Family Court. Justice Asher was entitled, when deciding costs, to look at the background to those decisions and to the overall outcome of the case upon which he adjudicated.[16] In this case, as Asher J set out in his first decision, that background included a refusal by Mr Zhao to engage formally with the Family Court.16 Mr Deliu, in his written submissions to us, confirmed that Mr Zhao took exception to the procedure adopted by the Family Court, refused to engage with the Family Court and instead applied to the High Court for judicial review.[17] We note, as did Asher J, that Mr Zhao's refusal to engage with theFamily Court extended to failing to comply with a direction of the Family Court that he appear to explain why he should not be held in contempt.[18] We acknowledge that although r 14.1 of the High Court Rules provides that all matters are at the discretion of the Court if they relate to costs, the discretion is not unfettered. It is qualified by the specific costs rules. Rule 14.7 regulates the award of reduced costs. None of the specific grounds in r 14.7(a)–(f) apply to this case. However, those grounds are not exhaustive. Rule 14.7(g) provides that the Court may reduce the costs otherwise payable under the Rules if:some other reason exists which justifies the court refusing costs or reducing costs despite the principle that the determination of costs should be predictable and expeditious.[19] In our view, Asher J in his costs judgment of 5 August 2015 addressed himself to the competing aspects of the case which needed to be recognised in the exercise of his discretion to award costs. He correctly gave more weight to thesuccess by the appellants than he did the background to the Family Court's decisionsand the underlying merit of Ms Chen's position. His modest costs award of $4,000 was open to him and, in our view, clearly appropriate.[20] This appeal is dismissed.16 Asher J substantive decision, above n 5, at [4]–[20].Associate Judge Bell's decisions[21] Richard Zhao Lawyers Ltd (RZL) applied to make Ms Chen bankrupt for failure to pay the $4,000 costs awarded by Asher J.[22] Associate Judge Bell considered that the minimum amount of indebtedness of Ms Chen to RZL was $17,988.30:17(a) Costs award by Asher J 4,000.00(b) Costs award in related case 9,803.30(c) Costs recommended by a reviewer (see [23]) 4,185.00Total $17,988.30[23] Mr Zhao had claimed costs of $13,402.25 under his lien. This sum was retained by him under the agreement negotiated during the proceeding before Asher J. A Law Society reviewer recommended that $4,185 was the fair and reasonable fee for Mr Zhao's work.[24] Associate Judge Bell decided that the $13,402.25 retained by RZL could be offset against Ms Chen's minimum total indebtedness:18[17] In short it is arguable for Ms Chen that upon adjudication the sum of $13,402.25 can be applied against her total indebtedness to Richard Zhao Lawyers Ltd. But that will not eliminate her indebtedness altogether. It would leave her short by $4,586.05 (without taking into account any adjustments for interest either way).[18] In a bankruptcy application, the court has a discretion whether to order an adjudication. The net indebtedness of Ms Chen is a relatively small sum of $4,586.05 (disregarding costs). As an alternative to bankruptcy, it is appropriate to give her the opportunity to clear that indebtedness. I intend to take that course. I adjourn this proceeding until 16 June 2016. The case is to be called in the miscellaneous list at 11:45am on that day. I shall be taking that bankruptcy list. I have adjourned the matter to give Ms Chen the opportunity to clear her indebtedness by paying Richard Zhao the sum of$4,586.05.17 Bankruptcy decision, above n 2, at [11].18 Bankruptcy decision, above n 2.[25] RZL applied for Associate Judge Bell to recall the judgment. The applicationrelated to Associate Judge Bell's reliance on $4,185 being the recommendation of thereviewer as to the fair and reasonable fee. What was drawn to Associate Judge Bell'sattention by RZL was that the Lawyers' Complaints Service will not rely on the reviewer's report but will appoint another lawyer as costs assessor.[26] Associate Judge Bell declined to recall his judgment:19[4] I relied on the report (in paragraph [10] of my decision) to establish a minimum indebtedness of the debtor to the creditor. I noted that the creditor had challenged the report and that further steps may be requiredbefore the debtor's liability for fees to the creditor could be established. Theappointment of a fresh costs assessor is within the contemplation of my judgment. The new evidence does not change anything.[5] The creditor can only make matters worse for itself by asking for recall. If I had not relied on the report in paragraph [10] of my decision, Iwould have found that the creditor's fees were subject to a bona fide disputeon substantial grounds and that there was no minimum sum payable. I would have removed the sum of $4,185.00 from my calculation in paragraph [11] of the decision. I accordingly dismiss the application for recall.[27] On 16 June 2016 Associate Judge Bell gave his decision on costs.20 First, his Honour noted that Ms Chen had paid the $4,586.05, being the difference between the money held by RZL pursuant to its lien and the total minimum indebtedness of $17,988.30 calculated by Associate Judge Bell.21 Accordingly, the Judge dismissed the bankruptcy application.[28] Associate Judge Bell noted that RZL was entitled to costs under r 14.2(a) of the High Court Rules22 and set out his conclusions:[5] This is a category 1 proceeding under r 14.3 as it was straightforward and could be conducted by junior counsel (although neither counsel is junior). I reinforce that decision by applying r 14.7. The amounts in issue were low. The way the creditor conducted the case added significantly to the costs of the debtor in the way that it dealt with thedebtor's application to set aside the bankruptcy notice. That setting asideapplication was an appropriate means by which the matters I dealt with in my decision of 10 June 2016 could have been addressed. Instead, the creditor took a technical point as to service of the setting aside application, which resulted in a heavy award of costs against the debtor. The bankruptcy19 Recall minute, above n 3.20 Costs minute, above n 4.21 At [2].22 At [3].hearing had to deal with the substantive matters in the debtor's setting asideapplication. I accordingly apply a daily rate of $1,480.00. I fix costs in the sum of $4,218.00.[29] The Associate Judge also ordered a stay of execution:[7] I order a stay of execution. There is unfinished business between theparties. The creditor has appealed against Asher J's costs decision. I amadvised that the appeal is to be heard on 29 September 2016. If the appeal fails in the Court of Appeal, the creditor may owe the debtor something for costs. The Law Society revision of the creditor's fees has not been completed. I treated the figure of $4,185 as representing the debtor'sminimum indebtedness to the creditor for fees, but that is now at large, given that a new costs assessor has been appointed. Arguably, with a new costs assessor, the Law Society might fix the fee at less than I allowed in my judgment.[30] RZL submits that Associate Judge Bell erred in a number of ways. The nub of the submissions is that Associate Judge Bell should not have regarded the $13,402.25 as being available to offset Ms Chen's indebtedness to RZL. Nor shouldhe have fixed $4,185 as the minimum amount owing by Ms Chen to RZL byreference to the reviewer's report. RZL further submits that the Associate Judgeshould not have granted a stay, stating that neither party applied for one. RZL also submits that a minimum of four days should have been granted for the relevant steps rather than the 2.85 days calculated by the Associate Judge.Discussion[31] In our view, the appeals against the decisions of Associate Judge Bell have no merit. Clearly, RZL holds money obtained from Ms Chen which is available to be used to set off the proven indebtedness of Ms Chen to RZL.[32] The Associate Judge referred to s 113 of the Lawyers and Conveyancers Act 2006 and the decision of this Court in Shand v M J Atkinson Ltd (in liq) to support his conclusion that a set-off was available.23 Whilst this area is not without its technical difficulties, we agree with the conclusion reached by the Associate Judge. The Court in Shand made it clear that a solicitor has a right to set off the costs of one23 Bankruptcy decision, above n 2, at [14]–[15] citing Shand v M J Atkinson Ltd (in liq) [1966] NZLR 551 (CA).matter from trust monies received in other transactions.24 In calculating the indebtedness of Ms Chen to RZL it was wholly appropriate to have regard to the funds RZL held on trust for Ms Chen.[33] Associate Judge Bell chose to regard the report of an experienced family lawyer, retained by the Law Society, as being a starting point for Ms Chen's liabilityfor fees. He stressed that it was a minimum liability. He required Ms Chen to pay the difference between the calculated minimum indebtedness and the sum held already by RZL. That was done. There was no reason why the Associate Judge should not then dismiss the bankruptcy application.[34] Indeed, if Associate Judge Bell made an error it was in RZL's favour. TheAssociate Judge treated the $4,185 recommended by the reviewer as payable by Ms Chen for Mr Zhao's work as a minimum amount for which Ms Chen was liable for that work. But it was not a debt due, as were the two costs orders. Section 161 of the Lawyers and Conveyancers Act 2006 prohibited proceedings for the recovery of the claimed $13,402.25 until after Ms Chen's complaint was finally disposed of.In our view, the position taken by Associate Judge Bell in [5] of his recall minute (which we quote at [26] above) is the correct one.[35] As to the appeal against Associate Judge Bell's award of costs, Mr Deliu argued that the Associate Judge was wrong to have regard to the related costs decision (of Associate Judge Doogue) as a justification to reduce costs. He submitted that in reaching his costs decision, Associate Judge Bell: applied an arbitrary and capricious daily rate. Bankruptcy proceedings are always categorized as 2B, in the sense that on research I have not been able to find a single case to the contrary (indeed, probably 99% of all litigation is categorised as 2B). Yet somehow this particular proceeding (with all the usual steps) was a 1? On what basis?[36] Mr Deliu summarises his case as follows:AJ Bell's handling of the issues of bankruptcy, recall and/or costs weremanifestly unfair and borders on palm tree justice. The decisions in question must be reversed.24 At 567 and 570.[37] Associate Judge Bell had to consider costs against a background of considerable litigation between the parties and procedural complications. We agree with Mr Deliu that the award of costs by Associate Judge Doogue in the related proceeding was not relevant to the award of costs in the particular case. However, we cannot say that Associate Judge Bell erred in deciding to classify the particular application for bankruptcy as a simple and uncomplicated application. The debt was a modest order of costs made by the High Court and all that was at issue was whether the money held by RZL was available as a set-off for Ms Chen's minimumtotal indebtedness.[38] We do not accept Mr Deliu's submission that the Associate Judge was wrongto order a stay with no application. Rule 14.1(1) of the High Court Rules provides that all matters are at the discretion of the Court if they relate to costs. The question on appeal is whether the grant of a stay was an objectionable exercise of this discretion. We cannot say that it was. Indeed, we consider the approach adopted by the Associate Judge to be sensible in the circumstances.[39] Mr Deliu lastly submitted that:A minimum of 4 days should have been granted for steps including application (.6), mention (.2), submissions (1.5), affidavits (.5), bundle (.6), appearance (.4) and sealing (.2).[40] Mr Deliu's calculations differ from Associate Judge Bell's in two respects.First, the Associate Judge allowed half a day for the preparation of written submissions rather than the 1.5 days proposed by Mr Deliu. That is because the Associate Judge determined that band A was appropriate for this step. In our view, that determination was within the discretion of the Associate Judge and we see no reason to intervene on appeal.[41] The second difference between the calculations concerns the time allowed for appearance at the hearing. The Judge allowed a quarter of a day whereas Mr Deliu proposes 0.4 days. At [20] of his bankruptcy judgment, the Associate Judge recorded that the hearing took a quarter of a day. Plainly, therefore, the Associate Judge did not err in allowing a quarter of day for this step in his costs calculations.[42] We conclude that the award of costs was within the discretion of the Associate Judge.Result[43] The appeals are dismissed.[44] The appellants must pay Ms Chen costs for each appeal as for a standard appeal on a band A basis and usual disbursements.Solicitors:Crown Law Office, Wellington for Respondent Family Court at AucklandHenley-Smith Law, Auckland for Respondent Chen