TOTAL AIR SUPPLY COMPANY LIMITED V TOTAL AIR SUPPLY COMPANY (2007) LIMITED HC AK CIV-2008-404-7627

TOTAL AIR SUPPLY COMPANY LIMITED V TOTAL AIR SUPPLY COMPANY (2007) LIMITED HC AK CIV-2008-404-7627 29 July 2011IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2008-404-7627BETWEEN TOTAL AIR SUPPLY COMPANYLIMITEDPlaintiffAND TOTAL AIR SUPPLY COMPANY (2007)LIMITEDDefendantAND JAMES DAVID RITCHIESecond DefendantAND PETER PIKE & ASSOCIATES LIMITEDThird DefendantAND KANU PATELFourth DefendantAND AUTO TEMP AIR CONDITIONINGLIMITEDFifth DefendantAND GILLIGAN & COMPANYThird PartyHearing: 22, 24 and 27 May 2011Counsel: G Bogiatto for PlaintiffGD Wadsworth for Third and Fourth DefendantsMC Harris for Third PartyJudgment: 29 July 2011 at 4:00 PMJUDGMENT OF TOOGOOD J[COSTS ON INTERLOCUTORY APPLICATION UNDER RULE 9.5(3)]This judgment was delivered by me on 29 July 2011 at 4:00 pmPursuant to Rule 11.5 High Court RulesRegistrar/Deputy RegistrarBackground[1] The plaintiff has claimed damages for alleged breaches of contractual, tortious and fiduciary duties arising from advice given by the defendants in relation to the sale and purchase of a business. The first and fifth defendants have been liquidated, and the second defendant has been adjudicated bankrupt. The third and fourth defendants (referred to in this Judgment as "the defendants") sue the third party for negligent misstatement and claim a contribution or indemnity under s 17 Law Reform Act 1936.[2] The case against the defendants and the third party was set down for a seven- day trial, beginning on 23 May 2011. The background facts are discussed in my Reasons for Judgment delivered on 25 May 2011.1[3] On the morning of the first scheduled day for the hearing, Mr Wadsworthfiled submissions in support of the defendants' objection to the plaintiff's statedintention to rely on evidence in the proceedings, by way of purported reply evidence briefs, which sought to introduce material relating to alleged errors or discrepanciesin the calculation of and provision for creditors in the first defendant's31 March 2007 financial statements. The defendants argued that the plaintiff required leave to admit the evidence under r 9.5(3) High Court Rules, and opposed the grant. Alternatively, if the evidence was ruled admissible, the defendants sought an order adjourning the proceeding so that they could prepare cross-examination and evidence in rebuttal.[4] These positions were supported by Mr Harris for the third party, although ultimately Mr Harris indicated that the third party would prefer the case to proceed whether or not the evidence was admitted.[5] After hearing from counsel, I ruled that the evidence which the plaintiff sought to adduce in reply would be admitted and I granted leave under r 9.5(3) accordingly. I also concluded that the defendants and the third party would be prejudiced in the proper presentation of their respective cases if they were required1 Total Air Supply Company Ltd v Total Air Supply Company (2007) Ltd HC AK, CIV-2008-404-7627,25 May 2011 (referred to hereafter as "the 25 May 2011 Judgment").to respond to the issue during the scheduled hearing, without adequate time to investigate the proposed evidence, take instructions, and prepare cross-examination and rebuttal evidence.[6] The question of costs arising from the plaintiff's tendering of the disputedevidence, the defendants' objection and consequential adjournment application, andrelated questions of wasted costs, were reserved for submissions and a hearing on 27 May 2011.The nature of the proceedings in respect of which costs are sought[7] The part of the proceeding in respect of which costs are now sought is properly to be regarded as an objection to the intention of Mr Bogiatto, on behalf of the plaintiff, to seek leave to adduce evidence under r 9.5(3) High Court Rules, and a consequential application by the defendants for an adjournment of the hearing if leave was granted.[8] The objection to the granting of leave and the adjournment application were signalled and dealt with prior to Mr Bogiatto being asked to open the case for the plaintiff. In my view, the proceedings should be regarded as opposed interlocutory applications.Relevant principles[9] By reason of r 14.8 High Court Rules, unless there are special reasons to the contrary, costs on interlocutory applications must be fixed in accordance with the rules when the application is determined, and become payable when they are fixed.[10] Prominent among the considerations in determining the incidence of costs are:(a) rule 14.2(a) which provides that the party who fails with respect to an interlocutory application should pay costs to the party who succeeds; and(b) rule 14.2(g) which provides that, so far as possible, the determination of costs should be predictable and expeditious.These two principles are subject to the overriding consideration that all matters relating to costs are at the discretion of the Court.[11] Rule 14.8(2) provides that the Court may reverse, discharge, or vary an order for costs on an interlocutory application if satisfied subsequently that the original order should not have been made.[12] Also relevant to the matters at issue is that the Court's discretion to grant anadjournment of a trial, in the interests of justice, may be made upon any terms the Court thinks just.2 While it is usually the case that the party seeking the adjournment will be susceptible to having to pay costs as a "term" of the adjournment,3 it does not follow that costs should be awarded against the applicant if the need for the adjournment arises because of the default of another party.[13] The defendants and the third party apply for costs on two discrete bases. First, they seek costs on a time and attendance basis in relation to the hearing of the opposed interlocutory application and the related costs hearing. Second, they seek wasted costs flowing from the adjournment.Costs in relation to the hearing of the opposed interlocutory application[14] For the defendants, Mr Wadsworth submitted that the costs in respect of the hearing of the contested application for leave, and the consequential application for an adjournment, should be approached on the basis that Sargisson AJ had determined in her telephone conference Minute of 5 February 2009 that the appropriate cost category for the proceeding was Category 2,4 for which the appropriate daily recovery rate is $1,880.00 per day. He assumed a band B approach under r 14.5(2)(b) and sought a total of $5,640.00 in accordance with items 4.13, 4.14 and 4.15 of the Schedule 3 time allocations.5[15] For the third party, Mr Harris invited me to take a more general approach, without distinguishing between costs on the opposed interlocutory application and2 High Court Rules, r 10.2.3 Utuao v Attorney-General HC AK, M 658/95, 7 March 1996.4 High Court Rules, r 14.3(1).5 High Court Rules, r 14.5 and Schedule 3.wasted costs. He suggested that I should award the third party 50 percent of its solicitor/client costs of $35,707.00 for the period from 1 March 2011 to 30 April 2011, and two-thirds of the third party's solicitor/client costs and experts'expenses and costs for the period from 1 to 24 May 2011, totalling $63,996.35.[16] For the plaintiff, Mr Bogiatto argued that the traditional steps relating to an interlocutory application, reflected by Mr Wadsworth's application of Schedule 3, were not followed in this case, a memorandum filed on the day of the hearing being the only formal step taken. Accordingly he submitted that the claim of $5,640.00 made on behalf of the third and fourth defendants should be reduced by deleting the claim for preparation ($2,256.00) and by such further percentage as the Court deemed appropriate in relation to the third and fourth defendants, and presumablythe third party's, contributory conduct to the situation which arose.Should Schedule 3 be applied?[17] It is necessary to address, first, the suitability of a strict application of the Schedule 3 time allocations, as Mr Wadsworth invites me to do. There is force in Mr Bogiatto's submission that such an approach would be unduly favourable to the defendants.[18] Schedule 3 contemplates that the hearing of an interlocutory application will involve the preparation and filing of the application and supporting affidavits; preparation for the hearing if the application is opposed; and the appearance of counsel at the hearing of the application. In the present case, there was no application or affidavits. Mr Wadsworth simply filed a 26-paragraph memorandumsetting out the defendants' submissions in support of their objection to the plaintiff'sintention to apply for leave to adduce the additional evidence. Mr Wadsworth also produced a bundle of relevant documents which included copies of relevant High Court Rules and two authorities. A chronology was also attached to the submissions.[19] Mr Harris did not produce any written submissions on behalf of the third party, as he seemed content to let Mr Wadsworth have the principal responsibility for the argument. He did take an active role in the hearing of the opposed application under r 9.5(3).[20] The hearing of the opposition to the grant of leave occupied a full day and I delivered my decision on the application, giving brief oral reasons, the next morning. Having heard from counsel on the desirability of an adjournment in the light of my ruling that the additional evidence would be admitted, I adjourned the interlocutory hearing for further submissions from the parties as to costs. These were to be submitted in the light of fuller written reasons for judgment on the interlocutory application which were delivered to the parties on 25 May 2011.[21] Although Mr Harris and Mr Bogiatto did not file written submissions in relation to the application for leave under r 9.5(3) to adduce the additional evidence, they both responded to my request for written submissions as to costs by filing helpful submissions in accordance with the prescribed timetable, as did Mr Wadsworth.[22] The total hearing time on 23, 24 and 27 May 2011 was six quarter days.[23] Applying the principle that the party who fails with respect to an interlocutory application should pay costs to the party who succeeds,6 the plaintiff would be entitled to costs on the unsuccessful opposition to its application for leave to adduce the additional evidence. For the reasons which appear below, however, I consider I should exercise my discretion against the application of that principle, and award costs to the defendants and the third party bearing in mind that ultimately, the rules should be applied so as to do justice between the parties.Why the plaintiff should contribute to the costs of the defendants and the third party[24] The background facts and the course of the proceeding up to the time of the adjournment are set out in the 25 May 2011 Judgment. In essence, I determined that the intention of the plaintiff to adduce the additional evidence as to the creditors issue was to remedy its failure to give the defendants and the third party "fair notice"in the second (draft) amended statement of claim, or in the third amended statement of claim, so as to put the defendants and the third party on notice that the creditors issue needed to be addressed by them in their evidence, and in their preparation for trial.6 High Court Rules, r 14.2(a).[25] It had been argued by Mr Bogiatto for the plaintiff that the defendants and the third party had been alerted to the importance attached by the plaintiff to the creditors issue by the disclosure made informally by the letter dated 24 January 2011, which the solicitor for the plaintiff sent to the solicitors for the defendants.7 I dealt with that proposition in the 25 May 2011 Judgment,8 by noting that while the plaintiff may have believed it had done enough to alert the other parties to the issue by the informal discovery of the relevant documents, merely discovering documents was not sufficient to meet the requirements of the High Court Rules as to proper pleading. I concluded that there was nothing in the second amended statement of claim served on 7 March 2011, nor in the third amended statement of claim served on 11 April 2011, to indicate to the defendants and the third party that the creditors issue was one which the plaintiff considered to be relevant to its claim.[26] I observed that the defendants and the third party, being accountants, could not have failed to understand the significance of the apparent understatement of creditors when the information was provided to them in January 2011. But I was prepared to accept that, because the plaintiff did not refer to the issue in its new pleadings, the other parties may have concluded that the plaintiff was not relying on the issue, notwithstanding its possible significance.[27] Despite being critical of the position taken by the plaintiff, I considered that the interests of justice required the granting of leave to the plaintiff to admit the evidence, but on the basis that the adjournment would be granted to enable the defendants and the third party to deal with the creditors issue appropriately.[28] The plaintiff was granted an indulgence and it is appropriate that that should come at a price which includes making a costs contribution.The approach to determining a just result in relation to costs[29] I acknowlede Mr Bogiatto's point that the interlocutory applications werebrought before the Court in an unusual way, in which the defendants simply filed a7 Referred to in 25 May 2011 Judgment at [26], [40]-[43].8 At [53]-[58].memorandum rather than an application and pleading, and the third party did not file any submissions in respect of the application for leave under r 9.5(3). I propose to order the plaintiff to pay costs to the defendants and the third party by applying Schedule 3, but in a way which reflects actual time and attendances involved in the unusual circumstances of the hearing.[30] I note that item 4.14 in Schedule 3 measures the appropriate allocation of time for preparation for a defended interlocutory application by equating it to the time taken for the hearing. In the circumstances of this case, I consider that to be excessive and that the costs of preparation for the interlocutory hearing can be adequately dealt with under item 4.13.[31] In response to a query by Mr Harris at the hearing on 24 May 2011, as to my tentative views as to costs, I said that while I had come to the view that the plaintiff ought to have pleaded the creditors issue or, at least, covered the issue in its evidence-in-chief, I had not reached a view as to the extent to which the defendants and the third party, ought to bear some responsibility for not investigating the issue of creditors after the January 2011 disclosure. I indicated that it seemed to me thatthe lion's share of the responsibility, however, must rest with the plaintiff.9[32] Having now had the benefit of further submissions from the parties, I havecome to the view that the plaintiff's efforts to alert the defendants and the third partyto the creditors issue by the informal disclosure undertaken in January 2011, while insufficient to properly put the other parties on notice in a pleadings sense, ought to be recognised by a 25 percent reduction in the costs which would otherwise be awarded if the provisions of Schedule 3 were applied.Decisions as to costs on hearing of r 9.5(3) application for leave[33] The plaintiff is to pay the defendants' costs on the opposed application forleave under r 9.5(3), and the costs application thereon, calculated on a 2B basis by reference to Schedule 3 as follows:9 The 25 May 2011 Judgment at [67].(a) costs for preparing and filing the opposition to the r 9.5(3) application under item 4.13 (0.6 days);(b) costs on preparing for the costs hearing under item 4.13 (0.6 days);(c) costs under item 4.15 for appearances at the hearing of the opposed leave application and the costs hearing, totalling 1.5 days;(d) the total sum calculated in accordance with paragraphs (a), (b) and (c) to be reduced by 25 percent.[34] On the same basis, the plaintiff is to pay costs to the third party as follows:(a) costs in respect of the preparing and filing of its costs memorandum under item 4.13 (0.6 days);(b) costs under item 4.15 for appearances at the hearing of the r 9.3(5) application and the costs application, totalling 1.5 days;(c) the total sum calculated in accordance with paragraphs (a) and (b) to be reduced by 25 percent.Wasted costs[35] Wasted costs may be claimed as increased costs under r 14.7(g) High Court Rules. An order for the payment of wasted costs is justified in this case, in my view, by reference to the consequences flowing from the plaintiff's failure to adequatelydisclose a significant part of its claim in either its pleadings or its evidence. That failure resulted in the defendants and the third party having substantially prepared for a meeting of expert witnesses, and for trial, on a basis which did not account for a significant issue which the plaintiff proposes to argue before the Court.[36] While it might be said that such work is not "wasted", because the fruits of it can be applied when the matter comes to trial next year, it is unrealistic to expect counsel and witnesses to remain in the state of readiness they would have been in in the week or so leading up to the start of the trial when the matter is not likely to be heard for a year or so. Furthermore, now that the creditors issue is squarely before the Court for argument, counsel and expert witnesses for the defendants and the thirdparty will necessarily have to revise their positions in the light of new pleadings and, potentially, new evidence.[37] I am mindful of the requirement in r 14.8(1)(a) that costs on an opposed interlocutory application must be fixed in accordance with the rules when the application is determined, unless there are special reasons to the contrary. There is good reason for the rule:(a) first, in that the Judge or Associate Judge hearing the application is likely to be the best person to deal with the costs issue; and(b) second, that if costs on interlocutory proceedings are to be reserved as costs in the cause, it may be many months or longer before costs in the substantive proceedings are dealt with. Costs on interlocutory matters are often overlooked if the proceeding is settled, or by the time costs are considered after a substantive judgment is issued.[38] I have not overlooked the ability of the Court to "reverse, discharge or vary an order for costs on an interlocutory application if satisfied subsequently that theoriginal order should not have been made."10[39] Costs incurred by the parties after the adjournment are costs which are recoverable in the substantive proceedings. The wasted costs are those incurred before the adjournment for work which cannot be used or applied to the substantive hearing.[40] The difficulty here, however, is that I am not in a position to fairly quantify wasted costs, because it is not possible to determine at this stage what consequences will flow from the granting of leave under r 9.3(5) and the adjournment in terms of the need to re-plead and to brief additional or revised evidence.[41] While it is possible to infer that revised pleadings will be necessary, and that there will be fresh briefs of evidence and another meeting of expert witnesses, it is not possible to say how much of the effort expended by the parties up to the granting of the adjournment will have to be duplicated and the cost of that effort wasted.10 High Court Rules, r 14.8(2).[42] I have taken longer in issuing this Judgment than intended, by taking time to consider a formula for assessing wasted costs on a principled and fair basis, but I have resolved in the end that the outcome would be purely speculative. That is not fair to any of the parties and, in the circumstances, I consider there are special reasons for not determining wasted costs at this point.[43] Accordingly, I adjourn that part of the application by the defendants and the third party for costs which relates to wasted costs. The defendants and third party will have leave to re-apply once they are in a position to quantify more accurately the costs up to the granting of the adjournment which are truly wasted. How close to the substantive hearing that may be will be a matter for the assessment of the parties.[44] Whether or not I am assigned to deal with the substantive claims when they are ready for trial, I direct that any revived application for wasted costs should be put before me for consideration in the first instance. If I am not available to deal with the matter in a timely manner, the application will have to be put before another Judge.Result[45] I make the orders for payment for costs identified in paragraphs [33] and [34]above and adjourn the application for wasted costs on the basis indicated............................................... Toogood JSolicitors:G Bogiatto, Auckland: George@bogiatto.co.nzGD Wadsworth, Kennedys, Auckland:M Harris, Gilbert Walker, Auckland: reception@gilbertwalker.com