Holdfast NZ Ltd v Selleys Pty Ltd [2005] NZCA 302; (2005) 17 PRNZ 897 (6 December 2005)

Last Updated: 18 December 2011

IN THE COURT OF APPEAL OF NEW ZEALAND

CA200/04

BETWEEN HOLDFAST NZ LTD
Appellant

AND SELLEYS PTY LTD
Respondent

Hearing: 1 August 2005

Court: Glazebrook, Chambers and O'Regan JJ

Counsel: D L Marriott and M C Hayes for Appellant
I M Gault and S D Bell for Respondent

Judgment: 6 December 2005

JUDGMENT OF THE COURT

A The appeal is allowed.

2. In place of the costs order imposed in the High Court, there will be an order that the appellant pay costs to the respondent in respect of High Court costs in the sum of $15,940.

100. In respect of costs in this court, the respondent must pay costs to the appellant in the sum of $4,000, plus usual disbursements.

D The costs orders in B and C may be set off against each other.

REASONS

(Given by Chambers J)

Table of Contents

Para No

An order for increased costs [1]
Issues on the appeal [10]
The appropriateness of increased costs [14]

Failure to accept Selleys’ settlement proposals [16]

Application for adjournment and to join another defendant [31]
The calculation of increased costs [37]
Calculation of scale costs [50]
Costs [54]

An order for increased costs

[1] In April 2003, Holdfast NZ Limited commenced a proceeding in the High Court at Hamilton against an Australian company, Selleys Pty Limited. Holdfast alleged that Selleys had committed the tort of passing off and had breached the Fair Trading Act 1986. Holdfast manufactured an adhesive product which it marketed under the trade mark Fix All. Holdfast alleged in its statement of claim that Selleys had started selling its own adhesive product under the trade mark All Fix. Holdfast said that was confusingly similar to its trade mark.
[2] The case trundled along its interlocutory path. The High Court allocated a fixture for 26 July 2004.
[3] On 24 June, just a month before trial, Holdfast sought to vacate the fixture. It also, at the same time, sought to join as second defendant a company called Orica New Zealand Limited. That company and Selleys are both subsidiaries of yet another Orica company: Orica is a worldwide group. The reason why Holdfast sought to join Orica NZ (as we shall call Orica New Zealand Ltd) was that, as a result of discovery, it had occurred to Holdfast’s lawyers that they might have sued the wrong company within the Orica group. To cover all bases, they decided it was prudent to join Orica NZ as a defendant in case they failed on the basis that they had sued the wrong company within the group.
[4] Selleys opposed the application. The application was put before Harrison J. He issued a minute on 30 June. He said that he would hear the application on 2 July. He said in the minute:

I note that I have read the application and supporting affidavit. I have advised Mr [X, counsel for Holdfast] that Holdfast has to meet a high threshold if it is to succeed and that in the event of failure I will consider an application by Selleys for indemnity costs.

[5] Faced with that indication, Holdfast decided to withdraw its interlocutory application, discontinue the proceeding, and to file new proceedings against Selleys and Orica NZ. The new proceedings were filed the following day.
[6] Following the filing of the notice of discontinuance, Harrison J issued a further minute on 7 July. He said in that minute that, in his view, Selleys was entitled to costs. The only question was whether they should be fixed according to category 2B or whether Selleys was entitled to “increased and/or indemnity costs”.
[7] Selleys did seek indemnity costs, failing that increased costs, failing that scale costs (which were calculated as being $15,940). Holdfast opposed that application for costs. It argued that Selleys, far from being entitled to any increase on the scale costs, should receive reduced costs.
[8] Harrison J did not agree. On 25 August last year, he delivered a judgment: Holdfast Manufacturing Limited v Selleys Pty Limited HC HAM CIV 2003-419-383 25 August 2004. (Holdfast Manufacturing Limited has since changed its name to Holdfast NZ Limited.) In that judgment, His Honour held that increased costs were appropriate. He ordered Holdfast to pay Selleys costs of $58,141. This was almost four times scale costs.
[9] Holdfast says that that order for increased costs was wrong in principle and has accordingly appealed against Harrison J’s decision.

Issues on the appeal

[10] There are three issues on this appeal. The first is whether this was an appropriate case for an order for increased costs.
[11] The second is, even if it was, were they correctly calculated?
[12] The third issue arises if we decide that this was not an appropriate case for an order for increased costs. In that event, Holdfast wishes to argue that Selleys’ calculation of scale costs was too high.
[13] We shall consider those issues in turn.

The appropriateness of increased costs

[14] Harrison J considered that Selleys was entitled to an award of increased costs on two bases (at [22]):

• (a) “Holdfast’s conduct in failing without reasonable justification to accept Selleys’ various proposals for settlement from July 2003 onwards (R 48C(3)(b)(iv))”; and
• (b) “To a lesser extent, [Holdfast’s conduct] in applying to adjourn the fixture for trial and join another defendant (R 48C(3)(b)(ii)).”

[15] We shall consider those two reasons in that order.

Failure to accept Selleys’ settlement proposals

[16] In order to assess the first reason, we need to set out what the offers and counter-offers were. The first offer was made by Holdfast on 3 April 2002. The offer was made in what Holdfast’s lawyers said was “a last ditch attempt to resolve the dispute between our respective clients without recourse to the courts”. That settlement offer was in these terms:

1. Selleys undertakes only to use the words ALL FIX in combination with SELLEYS and never to present SELLEYS in a font smaller than that used to present ALL FIX. As the mark is currently presented the words ALL FIX dominate the mark. Consequently we believe consumers are likely to refer to the product as ALL FIX as opposed to SELLEYS ALL FIX.
2. Selleys undertakes not to use the trade mark SELLEYS ALL FIX in relation to polyurethane based adhesives.
3. Selleys undertakes not to use the SELLEYS ALL FIX trade mark in New Zealand in the stylised form in which Holdfast currently uses the FIXALL trade mark or in any form confusingly similar therewith.
4. Selleys withdraws New Zealand Trade Mark Application Nos. 632996 and 632997.
5. Selleys amends the logo the subject of New Zealand Trade Mark Application Nos. 652178 and 652179 in order to comply with clause 1. In the event that Selleys is unable to amend the logo, Selleys abandons those applications and refiles in a form complying with clause 1.
6. Selleys will not object to or otherwise oppose Holdfast’s applications for, or use of, the FIXALL trade mark.
7. Selleys will, if required, consent to the use and registration of the FIXALL trade mark by Holdfast.

In consideration:

8. Holdfast will not object to, or otherwise oppose applications by Selleys to amend New Zealand Trade Mark Application Nos. 652178 and 652179 in order to comply with clause 1. In the event that Selleys is unable to amend the logo Holdfast will not object to, or otherwise oppose, new applications which comply with clause 1.
9. Holdfast undertakes not to use the FIXALL trademark in New Zealand in the same stylised form in which Selleys proposes to seek registration for its SELLEYS ALL FIX trade mark (as per clauses 1 and 5), or any confusingly similar form.
10. Holdfast will, if required, consent to the use and registration of the SELLEYS ALL FIX trade mark by Selleys (as per clauses 1 and 5).
11. Holdfast will waive its claim to damages in respect of sales of Selleys’ ALL FIX product to date.

The settlement is offered on the basis that costs lie where they fall. Holdfast reserves its position in respect of your client’s remaining stocks of ALL FIX product pending your response to this letter.

[17] It will be seen from the terms of that offer that Selleys currently had before the Commissioner of Trade Marks certain trade mark applications, which Holdfast was at the time threatening to oppose. In due course, when Selleys rejected this settlement offer, Holdfast did formally oppose Selleys’ applications. In this judgment, we shall refer to this dispute as “the trade mark litigation”, in contradistinction to the proceeding in tort and under the Fair Trading Act which Holdfast later commenced in the High Court.
[18] As already stated, Holdfast commenced its High Court proceeding against Selleys in April 2003. Selleys filed a defence to the High Court claim. Then, on 8 July 2003, Selleys itself made a settlement proposal, intended to resolve both the trade mark litigation and the High Court proceeding. The Selleys offer was in these terms:

1. Selleys will not use the ALL FIX trade mark in New Zealand except in the form of SELLEYS ALL FIX.
2. Selleys will not use the SELLEYS ALL FIX trade mark in New Zealand in the same stylised form in which Holdfast currently uses the FIX ALL trade mark (representation to be attached) or any confusingly similar form.
3. Selleys will withdraw application nos. 632996 and 632997 ALL FIX.
4. Selleys will not use the trade mark SELLEYS ALL FIX in relation to any polyurethane-based adhesives.
5. Holdfast will withdraw the opposition to Selleys’ application nos. 652178 and 652179 SELLEYS ALL FIX and will not object to the use of the SELLEYS ALL FIX trade mark by Selleys, subject to clause 2 above.
6. Holdfast will not use the FIX ALL trade mark in New Zealand in the same stylised form as represented in application nos. 652178 and 652179 SELLEYS ALL FIX (representation to be attached), or any confusingly similar form.
7. Selleys will, if required, consent to the use and registration of the FIX ALL trade mark by Holdfast.
8. Holdfast will, if required, consent to the use and registration of the SELLEYS ALL FIX trade mark by Selleys.

[19] Holdfast responded on 28 July:

The settlement proposal is nearly identical to the one tendered by Holdfast to Selleys on 3 April 2002. A copy of that letter is attached for your reference. Had Selleys accepted the settlement proposal over a year ago, Holdfast would not have had to incur substantial costs initiating High Court proceedings and trade mark oppositions against Selleys. Therefore, Holdfast is willing to settle both matters and accept the settlement proposal if Selleys agrees to pay Holdfast’s costs which total $25,000 to date.

[20] On 6 August 2003, Selleys rejected Holdfast’s counter-offer.
[21] Holdfast responded on 20 August. It said that it would not accept Selleys’ settlement proposal “without some form of payment”.
[22] There matters rested. Selleys did not explore what “payment” would clinch the deal.
[23] In December 2003, the prospect of settlement was again raised. Holdfast’s solicitors indicated that “a nominal payment would suffice”. In January 2004 Selleys offered $5,000. On 2 February 2004 Holdfast rejected the offer.
[24] There were no further settlement discussions prior to Holdfast’s filing the notice of discontinuance.
[25] There can be no doubt that it is very unfortunate that the trade mark litigation and the High Court proceeding did not settle at an early stage, given that the parties were very close to resolving terms by August 2003. Holdfast had advised that the terms were acceptable save that it wanted “some form of payment” towards costs – a figure obviously less than $25,000. Harrison J concluded that Holdfast’s stance from this point on was so unreasonable that it should be liable for increased costs from this time on.
[26] The difficulty we have with Harrison J’s evaluation is that we cannot see the basis for his conclusion that it was all Holdfast’s fault that the gap between the parties was not bridged. We have before us exactly the same evidence (such as it is) that he had before him. We find it impossible to work out from the available evidence who, if anyone, was acting unreasonably when it came to the failure to bridge the gap between the parties’ respective settlement positions. Where a proceeding ends in a judgment, the trial judge is in an excellent position to assess the reasonableness of the parties’ pre-trial stances. But this case did not go to hearing and did not end with a judgment: here the judge did not know how strong Holdfast’s case was and how justified it was in expecting Selleys to contribute something towards its costs.
[27] The position is complicated still further by the fact that the settlement proposals related to not only the High Court case but also the trade mark litigation. It is clear that Selleys was offering to withdraw two trade mark applications it had made. That suggests that Holdfast had been justified in opposing those applications. That in turn would suggest that Holdfast was not being unreasonable in seeking a contribution towards its costs in that regard. There was no evidence before the High Court to enable it to assess the merits of the parties’ respective stances on the separate trade mark proceedings. Nor was there any ability to assess whether Holdfast’s total fees of $25,000 (including the trade mark litigation) were reasonable, and, in any event, by 20 August 2003, Holdfast was not seeking a full indemnity. Harrison J’s assessment that “by 8 July 2003 Holdfast [would not have] incurred more than $10,000 in [the High Court] proceeding” is irrelevant as the settlement proposals were not limited to resolving the High Court litigation. There was no evidence before him as to what steps had been required by then in the trade mark litigation.
[28] Further, Mr Marriott, for Holdfast, asks rhetorically why, if Harrison J is so confident that the Selleys offer was so reasonable that Holdfast was unreasonable to reject it, it was not unreasonable for Selleys to reject a near identical settlement proposal the year before. At that time, Holdfast was prepared to settle “on the basis that costs lie where they fall”. Holdfast’s then counsel – not Mr Marriott - had obviously made a similar submission before Harrison J, as His Honour dealt with this suggestion in [21](b) of his judgment. His Honour there expressed the view that it was “irrelevant that Selleys’ offer replicated one made by Holdfast a year earlier”. But why was it irrelevant? If Selleys is entitled to increased costs for the period after 20 August 2003 because of Holdfast’s unreasonable rejection of its offer, why was Holdfast not entitled to increased costs up to then based on Selleys’ earlier rejection of Holdfast’s offer? Viewed in that light, was Holdfast’s request for a contribution towards its costs to date not entirely reasonable? We consider this submission of Mr Marriott’s to be soundly based.
[29] We are not to be taken as suggesting by the comments made in [26] above that a judge could never apply r 48C(3)(b)(iv) in a case where a proceeding was brought to a temporary halt by the filing of a notice of discontinuance. What we are saying is that, in those circumstances, any party seeking increased costs on the basis of the other’s failure “without reasonable justification” to accept a settlement proposal will need to establish clearly that the failure was unreasonable. More evidence than normal is required because the court does not have a definitive judgment against which to contrast the settlement offer. A court cannot assume that a discontinuance is akin to judgment for the defendant; indeed, what later transpired in this litigation is proof as to why such an assumption would be ill-founded.
[30] We therefore respectfully reject Harrison J’s first reason for an order for increased costs on the basis that there was insufficient evidence before him, as before us, to form any conclusion as to whether Holdfast’s conduct in holding out for a contribution towards its legal costs was sufficiently unreasonable as to bring r 48C(3)(b)(iv) into play.

Application for adjournment and to join another defendant

[31] The second reason Harrison J gave was Holdfast’s conduct “in applying to adjourn the fixture for trial and join another defendant (R 48C(3)(b)(ii))”. The application to which His Honour was referring was the application of 24 June 2004: see [3] above.
[32] For convenience, we set out the rule His Honour relied on:

The Court may order a party to pay increased costs if...the party opposing costs has contributed unnecessarily to the time or expense of the proceeding or step in the proceeding by...taking or pursuing an unnecessary step or an argument that lacks merit.

[33] With respect to His Honour, Holdfast’s 24 June application could not in any way justify the increased costs award. Selleys filed a notice of opposition on 29 June 2004. The next day Harrison J issued his minute. It contained the paragraph we have quoted above at [4]. Holdfast’s legal advisors regarded the tone of that minute as so discouraging that they immediately filed the notice of discontinuance. So the particular application to which His Honour referred never came on for hearing. All that Selleys did in relation to it was file a notice of opposition. Selleys did not even need to file any affidavit in opposition or prepare submissions in opposition, as the application was promptly withdrawn. Clearly Selleys should recover some costs in respect of that application, but there was no basis for holding that increased costs should be paid on that application, still less with respect to the whole proceeding.
[34] Harrison J appears to have considered that Holdfast’s lawyers were entirely at fault in needing to apply for an adjournment and for the late application to join Orica NZ. It is clear from the submissions presented to us that Holdfast’s lawyers regard Harrison J’s evaluation in that respect as fundamentally unjust. Mr Marriott took us through the procedural history of the proceeding in some detail. We do not need to go into the detail for the purposes of this judgment. It is sufficient to say that we can understand why it became necessary for Holdfast to seek an adjournment so that Orica NZ could be joined. It may be that, had Holdfast had more experienced counsel in the High Court, the need to join Orica NZ would have become clearer at an earlier stage, with the consequence that the need to adjourn the hearing would not have arisen. But the failure to recognise at an early stage that Orica NZ needed to be a party – if failure it be – was at least contributed to by some arguably evasive pleading and arguably inadequate discovery on Selleys’ part. The preliminary view Harrison J expressed in his 30 June minute – as quoted above at [4] – was perhaps reached a little too quickly. Of course, more experienced counsel might not have panicked to the extent that Holdfast’s then counsel did and would have realised that the judge’s preliminary view was just that – a preliminary view. Had the position been fully explained to Harrison J, there would have to have been a reasonable chance that the application to join Orica NZ would have been granted, albeit that would have necessitated an adjournment of the hearing against Selleys.
[35] In short, therefore, we do not accept that the application to join Orica NZ was “an unnecessary step” or that it involved “an argument that [lacked] merit”.
[36] We accordingly reject His Honour’s second ground for increased costs. There was no justification for increased costs in respect of the particular step, let alone justification for increased costs in respect of the proceeding as a whole.

The calculation of increased costs

[37] In view of our conclusion on the first issue, it is not strictly necessary to deal with the second, namely whether His Honour’s approach to calculating increased costs was appropriate. But we have decided to comment on it because we consider, with respect, that the approach adopted by His Honour was fundamentally wrong.
[38] Selleys’ counsel, by memorandum dated 22 July 2004, advised the High Court that Selleys’ “solicitor/client costs from 20 August 2003 until discontinuance [were] $83,059”. The significance of the date 20 August 2003 was that that was the date on which Holdfast advised that it would not accept Selleys’ settlement proposal “without some form of payment”. Selleys did not support its counsel’s submission by any affidavit evidence. No invoices were supplied. It was even unclear whether those solicitor/client costs related exclusively to the High Court proceeding or whether they also covered the trade mark litigation.
[39] In any event, Harrison J utilised the figure of $83,059 even though he formed a view – based on what is uncertain – that “Selleys’ costs [were] high” and even though he noted that Selleys had “failed to produce copies of fee notes in support of its claim”. He concluded at [22]:

Taking these factors into account I am satisfied that Holdfast should pay 70% of Selleys’ actual costs of $83,059 incurred since 20 August 2003. Accordingly, I order Holdfast to pay Selleys costs of $58,141.30 in this proceeding.

[40] That is not the correct way to approach an award of “increased costs”. An order for increased costs is defined in r 48C(1)(a) as an order “increasing costs otherwise payable under [rr 47-48B]”. Rules 47-48B establish the scale; thus, the court uplifts from scale. It is not a question of awarding a percentage of actual costs.
[41] There are very good practical reasons why a “percentage of actual” approach should not be sanctioned. Not all judges have recently been litigation lawyers and thus familiar with the current charging of litigators. Many judges have been commercial lawyers or academics or lawyers in the public service. Even those who have been litigation lawyers quickly get out of touch with current rates after appointment to the bench. There cannot be one approach to costs if the judge happens to be a recent appointment from the bar and another approach for judges who happen not to be. The approach must be uniform and cannot be based on a judge’s own assessment of the reasonableness of fees based on his or her recollection of what prevailed at the bar in his or her time.
[42] It is in any event well nigh impossible even for a judge who has recently been in practice to assess the reasonableness of a party’s legal fees from a cursory review of what appears on the court file. Here the judge assessed Selleys’ costs as “high”. But on what basis was that assessment made? There were no fee notes or time records. He did not know what hourly rates were being used. This shows the dangers of judges becoming involved in the assessment of the reasonableness of a party’s actual costs. Such an assessment may be unavoidable where indemnity costs are considered appropriate, although even there judges may well find it more sensible, in the event of a dispute as to reasonableness, for costs to be taxed by the registrar.
[43] Mr Marriott further submitted that, even if increased costs were warranted, it would be inconceivable that a court should ever award a figure approaching four times over scale. There is force in this submission. The correct approach to an award of costs is this. The first step is to categorise the proceeding in terms of r 48. There is no dispute that the current proceeding was a category 2 proceeding, being a proceeding “of average complexity requiring counsel of skill and experience considered average in the High Court”. Of course, that does not prevent a party selecting as its counsel a lawyer of above average skill – just as Selleys chose to do. But a party which chooses to have counsel of superior skill cannot expect the other party to pay for the additional cost which such extra skill quite reasonably commands.
[44] The next step in the costs formulation is to work out a reasonable time for each step in the proceeding: r 48B. There are three time bands, A, B, and C. Band C is appropriate where a “comparatively large amount of time is considered reasonable” for the particular step. It is possible to get a greater time allocation for the particular step if the costs-claiming party can show that “the step in the proceeding [was] such that the time required by the party claiming costs would substantially exceed the time allocated under band C”: r 48C(3)(a). Where that is shown, the appropriate judicial response is to increase the amount of time allocated for the particular step, and then to apply the appropriate daily recovery rate to the time so fixed. It has not been suggested in this case that any step in the proceeding justified an increase in costs under that head.
[45] Additional grounds for awarding increased costs are given in r 48C(3)(b). All these grounds depend on a finding that “the party opposing costs has contributed unreasonably to the time or expense of the proceeding or step in the proceeding”. The conduct justifying increased costs under subcl (3)(b) is to be contrasted with conduct that warrants indemnity costs, as set out in subcl (4)(a) and (b).
[46] Where subcl (3)(b) conduct is made out, the court’s normal response should be to provide an uplift on scale costs to what the rules contemplate a reasonable fee for that step to be. Mr Marriott submitted that logically an uplift under r 48C(3)(b) should not be more than 50%. That is because the Rules Committee has determined what, for costs purposes, the appropriate “daily rate” is: it is the “daily recovery rate” in Schedule 2 to the High Court Rules, plus 50%. The current daily recovery rate for category 2 proceedings is $1,450 a day. We know, by reason of r 47(d), that that represents “two-thirds of the daily rate considered reasonable in relation to [a category 2] proceeding”. That in turn means that the underlying daily rate was $2,175 ($1,450 plus 50%).
[47] An increase of 50% on scale costs should therefore grant the costs-claiming party a fair recovery for the step unnecessarily forced on it, assuming that the time allocated to the step has been reasonably calculated under the bands or under r 48C(3)(a). Any greater recovery than that would mean that the party paying costs is contributing to the other party’s choice of special counsel.
[48] We are not to be taken as saying that an uplift of more than 50% can never be justified under r 48C(3)(b), as there may be circumstances where the court considers a higher award to be justified. What we are saying is that the above approach is what is logically required by the scheme of the rules, and in particular by the principles applicable to every determination of costs. Awards of increased costs must comply with the general principles in r 47, except to the extent that the specific requirements of r 48C dictate otherwise. The principles in r 47(c) and (d) are clearly modified by r 48C(3)(b), but r 47(e) is not so modified. Where increased costs (as opposed to indemnity costs) are being considered, the focus remains on the notional solicitor or counsel appropriate for the category of proceeding, not the actual solicitor or counsel involved or the costs actually incurred by the party claiming costs.

Calculation of scale costs

[49] We turn now to the third issue raised on this appeal.
[50] If Harrison J were held to be wrong in awarding increased costs, then Selleys did not attempt to argue that costs should be other than 2B costs, which they had calculated as being $15,940. Selleys did not attempt to argue that any step in the proceeding warranted a band C time allocation, let alone a longer time pursuant to r 48C(3)(a).
[51] Mr Marriott argued, however, that Selleys’ scale claim of $15,940 had been miscalculated and was too high by some $6,000. There were three items of alleged over-claim. The major deduction he sought ($2,900) was in respect of item 7.4 in Schedule 3 to the High Court Rules. That item related to Selleys’ “preparation for hearing” in circumstances where “trial does not eventuate” and covered its “preparation of lists of issues and authorities, selecting documents for common bundle of documents, and all other preparation”. That challenge is clearly wrong: Selleys quite rightly got itself ready for a trial set down for 26 July 2004. Further, Selleys did not claim (perhaps through inadvertence) under item 7.3: “Preparation of affidavits or written or oral statements of evidence to be used at hearing”. On band B, a claim of two days ($2,900) would have been justified under that head. Mr Gault, for Selleys, advised us that Selleys had commenced (but not completed) trial preparation as at the date of discontinuance.
[52] Given the under-claim in that respect, we consider that that more than cancels out the other two alleged over-claims.
[53] In the circumstances, we consider that Selleys should have as its scale costs the sum it calculated, namely $15,940.

Costs

[54] Holdfast has been successful in this court. It should have costs in this court on the normal basis for a half day hearing. We do not certify for second counsel as this was an appeal which could have been handled by a single counsel on each side.

Solicitors:
James & Wells, Auckland, for Appellant
Bell Gully, Auckland, for Respondent