Low Cost Tyres Limited v Eastgate Low Cost Tyrez Limited [2018] NZDC 13977 (1 August 2018)

Last Updated: 21 May 2019

IN THE DISTRICT COURT AT GISBORNE

CIV-2016-016-000069

[2018] NZDC 13977

BETWEEN	LOW COST TYRES LIMITED Plaintiff
AND	EASTGATE LOW COST TYREZ LIMITED First Defendant
AND	CASSINO EGYPT SMITH Second Defendant
AND	LEONORA HEHIMA SMITH Third Defendant
AND	EDWARD ALEXANDER Third Party

Appearances:	N Smith for the Plaintiff Ms E Horner for the First, Second and Third Defendants Mr M Francis and Ms A Couples for the Third Party
Judgment: (On the papers)	1 August 2018

DECISION OF JUDGE L C ROWE

[As to interest and costs]

[1] On 10 April 2018, I issued judgment for the plaintiff against the defendants in the sum of $150,000 and judgment for the defendants against the third party for the same sum.1

[2] I sought submissions as to the extent of interest payable on the judgment sum and costs.

1 Low Cost Tyres Limited v Eastgate Low Cost Tyrez Limited and Ors [2018] NZDC 3446

LOW COST TYRES LIMITED v EASTGATE LOW COST TYREZ LIMITED [2018] NZDC 13977 [1 August 2018]

[3] Paragraphs [213], [225] and [226] of my judgment are ambiguous as to the third party’s liability for interest and costs. In seeking submissions on these issues, I intended that the third party be given the opportunity to make submissions as to the extent of the third party’s obligation (if any) to meet the defendants’ liability for costs to the plaintiff. As it happens, all parties have made submissions on the basis these issues are “live” between all parties.

Issues to be resolved

[4] The first issue concerns the proper calculation of the contractual rate of interest, including the date from which the calculation should commence, the principal amounts against which the interest should be charged and the applicable rate.

[5] The second issue is whether indemnity costs are payable by the defendants to the plaintiff and, if so, the reasonableness of the costs claimed.

[6] The third issue, related to the second, is whether the plaintiff’s costs are affected by the defendants having been partially successful on their counterclaim.

[7] The fourth issue is whether the third party is liable to pay any of the plaintiff’s costs.

[8] The fifth issue, related to the fourth, is whether, if the third party is liable for the plaintiff’s costs, this amounts to a “debt, demand or damages” causing the defendants’ claim against the third party to exceed this Court’s $200,000 jurisdictional limit.2

[9] The sixth issue is the third party’s liability for the defendants’ costs on the third party claim.

Interest – what is the correct calculation? Who is liable?

[10] The plaintiff’s claim against the defendants was for repayment of a vendor loan of $170,000 advanced to the first defendant to allow the first defendant to purchase

2 This proceeding was commenced when the District Courts Act 1947, s 29 applied.

the plaintiff’s business. Repayment of the vendor loan was guaranteed by the second and third defendants.

[11] The defendants were successful in a counterclaim to the extent that I held the vendor/plaintiff had breached a term of the agreement for sale and purchase (ASP), the plaintiff ought to pay $20,000 damages for this breach, and the sum ought to be set off against the plaintiff’s claim against the defendants. The extent of the vendor loan repayable by the defendants was therefore $150,000 plus interest on that sum.

[12] The ASP, at clause 18.0 (c) provided that a penalty interest rate of 12% per annum would apply “for any overdue monies owed”.

[13] The term loan agreement (TLA), at Part 1, Table B, provided for interest payable at the agreed rate of 12% per annum on any sum owing after the “due date for payment”.

[14] The parties disagree about the meaning of the words “due date for payment”.

[15] The plaintiff argues that the due date for payment is the date each instalment was due or the date the full amount was due if demand for payment was lawfully made in terms of the contract.

[16] Repayment of the vendor loan was to be by equal instalments of $17,000 payable on the first of each month beginning 1 October 2015. Making allowance for the $20,000 counterclaim/set off, the plaintiff says that, by 1 December, $31,000 of the principal sum was due and payable. The plaintiff called up the loan by notice on 3 December and demanded that the entire principal sum be repaid. The plaintiff says interest ought to be calculated on the full amount of the principal sum from 1 January 2016 onwards.

[17] The defendants and third party however argue that the instalments of $17,000 per month ought to be adjusted to equal instalments of $15,000 per month, given the

$20,000 counterclaim set off, and interest calculated monthly on the accruing instalments.

[18] I consider the plaintiff’s approach to be correct because:

• (a) The plaintiff pleaded its right to call up the loan (at para 5.g. of the statement of claim). This was admitted by the defendants, subject to their claim that the plaintiff’s misrepresentations or breaches of contract extinguished the plaintiff’s claim entirely. I found against the defendants except for the $20,000 counterclaim damages award. The defendants did not otherwise assert that the plaintiff did not have the contractual right to call up the vendor loan. The plaintiff’s position is admitted on the pleadings.
  
• (b) The TLA, at clause 7(a)(i), gave the plaintiff the right to call up the entire loan in the event the defendants’ defaulted on any repayments.
  
• (c) The defendants had defaulted in repayments by 3 December 2015 when the Plaintiff called up the loan.
  
• (d) The entire amount of the principal was accordingly due for payment following demand in terms of the contract.
  

[19] Interest was accordingly payable in terms of the plaintiff’s calculation but with the following variations.

Repayment date	Principal amount due	Interest payable
1 October 2015	- $3,000 ($17,000 - $20,000)	$0
1 November 2015	$14,000 ($17,000 - $3,000)	$138.08
1 December 2015	$31,000 (14,000 + $17,000)	$315.95
1 January 2016-10 April 2018	$150,000	$40,932
Total		$41,386.03

[20] The plaintiff also claims an additional one month’s interest under the general security agreement (GSA) entered between the plaintiff and the defendants, clause 21 of which provides:

If default occurs, the secured monies will become due and payable by the party granting the security in accordance with the provisions of any agreement relating to their payment or, to the extent any notices required by law to be given before the secured monies become payable, immediately on expiry of the relevant notice period, without the need for any further notice or demand together with interest calculated at the prescribed interest rate for a period of one month in addition to interest to the date of repayment of the secured monies. (My emphasis)

[21] Despite this clause, I do not uphold the plaintiff’s claim to the extra one month of interest because:

• (a) It is contrary to the ASP which provided only for penalty interest for any overdue monies owed. The extra month of interest does not accord with what was agreed between the parties.
  
• (b) The plaintiff did not plead an entitlement to the extra month of interest and the defendants were not called upon to answer that claim. The plaintiff’s prayer for relief seeks only interest pursuant to the TLA at 12% per annum from 1 October 2015 “on the amounts outstanding”.
  

[22] While the defendants are liable for penalty interest, the third party is responsible for this loss or liability for the reasons explained in my 10 April decision.3 The third party is therefore liable to pay all of the plaintiff’s interest.

Are indemnity costs payable by the defendants and, if so, how much?

[23] The plaintiff seeks indemnity costs on a solicitor/client basis. It relies on costs provisions in the TLA, the GSA, and it relies on the pleadings.

[24] Clause 7(f) of the TLA provides:

7. RIGHTS AND POWERS OF LENDER ON DEFAULT

3 Particularly [205] – [213].

(f) Costs of default are payable: All sums expended by the lender in the exercise of the lenders rights and powers following a default or in exercising or enforcing or attempting to exercise or enforce any power, right or remedy contained or implied in this contract are payable by you to the lender upon demand. This clause does not limit any other term of this contract relating to costs; nor is it limited by any other such term.

[25] Clause 12(a)(ii) of the TLA provides:

12. COSTS

(a) Costs payable by you: You must pay to the lender upon demand, the lender’s legal costs (as between solicitor and client) for:

(ii) Costs on default: Legal services arising from or relating to any default under this contract or the enforcement or exercise or attempted enforcement or exercise of any of the lender’s rights, remedies and powers under this contract...

[26] Clause 20(g)(i) of the GSA provides:

20. RIGHTS AND POWERS OF SECURITY HOLDER ON DEFAULT

(g) Costs of default are payable and are secured: All sums expended by the security holder in the exercise of the security holder’s rights and powers following a default or in exercising or enforcing or attempting to exercise or enforce any power, right or remedy contained or implied in this instrument will be:

• (i) payable by the party granting the security to the security holder upon demand.
  

[27] Clause 29(a)(ii) of the GSA provides:

29. COSTS

(a) Costs payable by the party giving the security: The party granting the security must pay to the security holder upon demand, the security holder’s legal costs (as between solicitor and client) for:

(ii) Costs on default: Legal services arising from or relating to any default under this instrument or the enforcement or exercise or attempted enforcement or exercise of any of the security holder’s rights, remedies and powers under this instrument...

[28] Clause 5(j) of the statement of claim refers to clause 7(f) of the TLA and pleads that the defendants were liable for all costs incurred by the plaintiff in the event of a default. The defendants admit that pleading in their statement of defence and

counterclaim but assert that the plaintiff’s misrepresentations absolved them from liability. I dismissed the defendants’ assertions of misrepresentation in my 10 April decision.4

[29] The defendants and third party submit that the plaintiff is not entitled to solicitor/client costs having breached the ASP giving rise to the defendants’ successful counterclaim for damages of $20,000.

[30] The plaintiff’s breach of the ASP however does not alter the fact that the defendants were, by December 2015, in default under the TLA. The plaintiff then demanded repayment of the entire loan, as it was entitled to do, and from then on, the defendants were in further default of the TLA by not meeting that demand.

[31] In those circumstances, the provisions of the TLA and GSA referred to above, unambiguously provide that solicitor/client costs are payable by the defendants as borrowers, guarantors or covenantors. I have no discretion to depart from solicitor/client costs other than on public policy grounds, or as part of my assessment of whether the costs are objectively reasonable.5

[32] No issue of public policy arises and the costs and disbursements claimed by the plaintiff are objectively reasonable. The plaintiff’s counsel has provided detailed invoices for the steps taken to enforce the TLA and GSA following the defendants’ default, including taking this matter to trial. Neither the defendants nor the third party assert that the costs claimed by the plaintiff are excessive.

Should the plaintiff’s costs be affected by the successful counterclaim?

[33] There are authorities to the effect that, if solicitor/client costs are payable for the enforcement or attempted enforcement of a lender’s rights, then the lender is entitled to all of those costs even if it is not completely successful in its claim.6

4 At [67], and [73] – [75]

5 Beecher v Mills [1993] MCLR 19 at [24]-[25]; Watson & Son Ltd v Active Manuka Honey Association [2009] NZCA 595 at [25]; Freshmax NZ Ltd v Oak Glen Orchards Ltd & Ors [2012] NZHC 2910 at [40].

6 Freshmax NZ Ltd v Oak Glen Orchards Ltd, n 5; South Canterbury Finance Ltd v Tyler, HC PN, CIV- 2010-454-328, 29 October 2010; and Wire by Design Ltd (In Receivership and in Liquidation) v Commercial Factors Ltd [2015] NZHC 985 at [124], and, on appeal, [2015] NZCA 630.

[34] These authorities however relate to lenders’ claims that were not entirely successful not defences to counterclaims that were unsuccessful.

[35] The clauses of the TLA and GSA, referred to above, provide for all sums to be payable when exercising or enforcing, or attempting to exercise or enforce the lender’s rights, remedies and powers under the respective contracts. Unsuccessfully defending a claim for breach of a term of the ASP is, self evidently, not enforcement of a power, right or remedy under the TLA or GSA.

[36] Having said that, the defendants were not entirely successful in their counterclaims. The defendants claimed that the plaintiff’s breaches of the ASP ought to result in damages that were the equivalent of the plaintiff’s claim. The damages award however was restricted to $20,000.

[37] The most suitable way to recognise the extent to which the plaintiff was unsuccessful in its defence of the counterclaim, and the defendants were partially successful is to:

• (a) Reduce the plaintiff’s cost award by the proportion to which it was unsuccessful; and
  
• (b) Award scale costs to the defendants, as a set off against the plaintiff’s costs but reduced by the same proportion.
  

[38] The plaintiff’s solicitor/client costs are $97,248.45, including GST. The successful counterclaim resulted in a set off against the plaintiff’s claim by approximately 12%. 12% of the plaintiff’s solicitor/client costs is $11,669.81.

[39] The defendants have produced a costs schedule against the first third party only. As pointed out by counsel for the third party, many of the items in the defendants’ schedule relate to preparation and trial for the defence and counterclaim as well as the claim against the third party. The only item that is uniquely part of the claim against the third party is the first item for commencement of proceedings against the third party, with a Schedule 4 time allocation of 1.5 days. The corresponding time allocation

for issuing the counterclaim in Schedule 4 is 0.5 days. Assuming half of the defendants’ costs related to the defence and counterclaim and adjusting the time allocation for commencing the counterclaim, the scale costs associated with the defence and counterclaim were $17,755.50. 12% of that sum is $2,130.66.

[40] As provided in Rule 14.16, the plaintiff’s costs award will therefore be reduced by $13,800.47 (by adding $11,669,81 to $2,130.66). The costs awarded to the plaintiff are therefore $83,447.98, including GST.

[41] I make no adjustment to the disbursements claimed by the plaintiff however. The plaintiff was vindicated in defending the full amount sought in the counterclaim including briefing and calling the planning consent expert, Bess Hayley. Her evidence was instrumental in allowing the Court to assess the appropriate award of damages for the plaintiff’s breach of clause 6.1 of the agreement for sale and purchase.7

[42] Standing back and looking at the question of costs for the plaintiff, I consider the above analysis to accord with this Court’s discretion as to costs under Rule 14.1 and the principles applying to the determination of costs, particularly the requirement to recognise the extent to which the respective parties have succeeded in this proceeding in terms of Rule 14.2(1)(a).

Is the third party liable to pay the plaintiff’s costs?

[43] The defendants chose to defend the plaintiff’s claim on the basis of what they considered to be misrepresentations by or on behalf of the plaintiff and breaches of the ASP by the plaintiff. They were only partially vindicated in doing so.

[44] The position they asserted at trial however was based on Mr and Mrs Smith’s belief that they had entered side agreements or “gentlemen’s agreements” that protected them in the event the tyre business they were purchasing did not achieve the required turnover. In my 10 April decision I found that the Smiths genuinely (albeit mistakenly) considered they had entered side agreements about turnover, that the plaintiff would buy the business back from them if the turnover was not achieved, and

7 Paragraphs [94] to [98] of the 10 April decision.

that these were fundamental requirements for the Smiths.8 Mr Hunt was either aware of the Smiths’ requirements and misunderstandings or ought to have been aware of these.9

[45] By defending the proceedings on the basis of what I found to be genuine misunderstandings, the defendants were doing nothing more than asserting the very position Mr Hunt ought to have achieved for them having undertaken to act for them.

[46] Accordingly, while it could be said that Mr Hunt ought not be responsible for how the defendants chose to conduct their defence to the plaintiff’s claim, equally, his failures as their lawyer placed them in that position. Further, the effect of my 10 April judgment was that Mr Hunt was ultimately responsible to the defendants to meet the plaintiff’s claim. It was accordingly open to Mr Hunt to have accepted this liability (which I find to have been clearly established) at an early stage to save all parties the costs of these proceedings.

[47] For these reasons, I consider the plaintiff’s costs and disbursements, established above, to be costs that Mr Hunt is obliged to pay.

Are the plaintiff’s costs debt demand or damages in relation to the third party?

[48] Costs are not part of a claim. They are a consequence of success (or failure) in a proceeding.10

[49] This is made clear by s 36(2) of the Act which prohibits a plaintiff from recovering an amount exceeding $200,000 together with costs thereon.

[50] The position is no different whether costs are sought according to scale or according to a contract of indemnity. Indemnity costs are specifically provided for as part of the costs regime in Rule 14.6.11

8 At [201].

9 For example, I found, at [199], that Mr Smith expressly mentioned a “buy back” requirement in the meeting at Mr Hunt’s office on 26 August 2015 when the agreement was signed.

10 Brooks v Vernon [1990] 3 NZLR 601 at p6.

11 A similar point was made by Hubble DCJ in Arcade Limited v Vesey, DC Auckland, CIV-2009-004- 275, 29 October 2009 at [42].

[51] The vagaries of litigation are such that costs may be significant, particularly on a solicitor/client basis, due to factors entirely out of a litigant’s control. The jurisdictional limit is set to allow certainty by the parties as to the venue chosen to resolve their dispute. The uncertain costs of resolving a dispute within that venue are therefore properly outside of the jurisdictional limit. In this case, of course, the third party has participated in these proceedings without raising any prior question as to this Court’s jurisdiction.

[52] Finally, costs fall to be determined “in a proceeding” as between the parties who participate in that proceeding. In terms of Rule 14.1(1), the plaintiff’s costs (with one possible exception) relate to costs of this proceeding or incidental to this proceeding for which the third party may be made liable subject to the properly exercised discretion of the Court.

[53] The only possible exception is the first invoice tendered by the plaintiff’s counsel, Mr Smith, of $2,139, which relates to calling up the plaintiff’s loan in December 2015, and subsequent demands for payment. I take the view that these steps are incidental to this proceeding and therefore covered by Rule 14.1(1)(b). If I am wrong, the costs associated with calling up the loan and making demand do not elevate the total award to the plaintiff for their claim (as allowed) plus contractual interest (as calculated above) to exceed the Court’s $200,000 jurisdiction.

[54] The plaintiff’s costs, as against the third party, are not a debt, demand or damages in terms of s 29 of the District Courts Act 1947. The third party’s submission that this Court does not have jurisdiction to make the third party liable to pay the plaintiff’s costs is accordingly rejected.

What is the third party’s liability for the defendants’ costs?

[55] As observed by the third party’s counsel, the third party could not dictate how the defendants chose to conduct their defence to the plaintiff’s claim. As already noted however, the defendants’ position and misunderstandings, which underpinned their defence, were brought about by failures on the part of the third party.

[56] Had the defendants admitted liability for the plaintiff’s demand for repayment of the vendor finance and restricted their proceedings to a claim for damages against the plaintiff for breaches of the ASP, and a claim against the third party for breach of the contract of retainer, indemnity or contribution, then all of the same issues (and probably all of the same witnesses and hearing time) would have been required. The defendants would still have asserted matters which the third party did not accept such as:

• (a) A genuine misunderstanding as to the represented turnover.
  
• (b) A genuine misunderstanding as to an agreed buy back clause or some other form of forbearance on the part of the plaintiff.
  
• (c) That Mr Hunt was aware of these issues.
  
• (d) That Mr Hunt was acting for the Smiths.
  
• (e) That Mr Hunt failed to alert Mr and Mrs Smith to their personal liability for the vendor loan, and the bases for their personal liability.
  
• (f) That Mr Hunt was in breach of his contractual, professional, fiduciary and tortious duties in relation to the Smiths.
  

[57] All of the costs claimed in the defendants’ schedule would likely have been incurred regardless of how the defendants dealt with the plaintiff’s claim.

[58] The schedule costs sought by the defendants against the third party are accordingly appropriate and consistent with the time taken, and steps required, to sheet home the defendants’ claim against the third party.

[59] Further, the third party has benefited from the extent to which the defendants were successful against the plaintiff by reductions in the plaintiff’s judgment and costs awards.

[60] The third party objects to paying the fees of Mr Ede, the expert solicitor called as a witness for the defendants in their third party claim. It is correct that Mr Ede’s evidence was largely confined to the extent of Mr Hunt’s fiduciary obligations, particularly where there was a conflict of interest. Mr Ede agreed that many of the points he made about these issues were subject to my factual findings. This did not however render Mr Ede’s evidence irrelevant or unhelpful. Mr Ede was ultimately correct in his analysis of Mr Hunt’s obligations in this case, particularly in relation to the obvious conflict of interest which Mr Hunt failed to confront when he chose to act for all parties in this transaction. I consider Mr Ede’s evidence was properly placed before the Court as part of the defendants’ claim against the third party and is properly payable by the third party, he having failed with respect to this proceeding.

[61] The third party’s liability for costs is not reduced by his having made a settlement offer of $75,000. The plaintiff and the defendants were vindicated in not accepting this offer, and participated in a judicial settlement conference.

Outcome

[62] The following orders arise from the above:

• (a) I award interest to the plaintiff on its judgment sum up to 10 April 2018 in the amount of $41,386.03.
  
• (b) I award the plaintiff costs of $83,447.98, including GST, and disbursements of $10,562.90.
  
• (c) I award the defendants costs, in accordance with scale 2B of $35,511 plus disbursements of $12,748.68 (which includes Mr Ede’s fee).
  
• (d) The plaintiff’s interest and the plaintiff’s and defendants’ costs and disbursements are payable by the third party.
  

L C Rowe

District Court Judge