Firma Construction Limited v Ace Structural Limited [2019] NZCA 631 (10 December 2019)

Last Updated: 17 December 2019

IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA

CA354/2019 [2019] NZCA 631

	BETWEEN	FIRMA CONSTRUCTION LIMITED Appellant
	AND	ACE STRUCTURAL LIMITED First Respondent JOHN GREEN Second Respondent

Counsel:	K A Badcock for Appellant B L Martelli for First Respondent No appearance for Second Respondent
Judgment: (On the papers)	10 December 2019 at 11.30 am

JUDGMENT OF COOPER J ON COSTS

The appellant must pay costs of $3,600 to the first respondent on the abandonment of the appeal, together with any disbursements.
____________________________________________________________________

REASONS

[1] The first respondent (Ace) seeks costs from the appellant (Firma) following the abandonment of the appeal. Regrettably, the parties have not been able to agree on the quantum of costs payable. Memoranda have been filed in which:

• (a) counsel for Ace seeks indemnity costs of $5,479.75; and
• (b) counsel for Firma opposes any claim amounting to more than $2,390.

[2] The appeal was from a judgment of the High Court on an application for judicial review of the decision of an adjudicator in the Building Disputes Tribunal not to award costs to Ace as part of his determination of disputes under the Construction Contracts Act 2002 (the Act) between Ace and Firma.^[1] The adjudicator had found that Firma was liable to pay Ace for unpaid progress claims and variations in the sum of $105,737.12 (GST inclusive) together with interest up to and including the date of his determination.^[2] He held that the parties were to bear their own costs and expenses of the adjudication.^[3] There had been no bad faith on the part of Firma, nor were its allegations and objections without substantial merit. The costs of the adjudicator were to be met in equal proportions, each party being liable to pay $35,127.^[4]
[3] Section 56(1)(a)–(b) of the Act provides as follows:

(1) An adjudicator may determine that costs and expenses must be met by any of the parties to the adjudication (whether those parties are or are not, on the whole, successful in the adjudication) if the adjudicator considers that the party has caused those costs and expenses to be incurred unnecessarily by—

(a) bad faith on the part of that party; or

(b) allegations or objections by that party that are without substantial merit.

...

[4] I note in addition that under s 56(2) of the Act, if the adjudicator “does not make a determination” under s 56(1), the parties to the adjudication must meet their own costs and expenses.
[5] In its application for review Ace challenged the adjudicator’s determinations that there were no grounds to consider there had been bad faith on the part of Firma, and there were no circumstances to warrant a conclusion that Firma had made allegations or objections that were without substantial merit. Ace also challenged the determination that the parties should bear their own costs and expenses of the adjudication.
[6] The High Court upheld Ace’s claim for orders quashing the adjudicator’s findings that there were no grounds to consider there had been bad faith on the part of Firma under s 56(1)(a), that there were no circumstances to warrant a conclusion that Firma had made allegations or objections that were without substantial merit under s 56(1)(b) and consequently that Ace and Firma should bear their own costs and expenses of the adjudication.^[5] On the s 56(1)(a) issue, the Court found that the adjudicator had given no reasons for his conclusion;^[6] and in terms of s 56(1)(b), the Court considered the reasons given were inadequate.^[7] The Court remitted the matter back to the adjudicator to re-determine costs, and give appropriate reasons.^[8]
[7] In its notice of appeal to this Court, Firma alleged the High Court erred in finding that the adjudicator was required to provide reasons on the issue of bad faith, and in finding that he had provided inadequate reasons on the “without substantial merit” issue. It asserted that the adjudicator was not obliged to give reasons, as he had applied a “fundamental principle” relating to costs. The principle relied on was that costs in adjudications under the Act lie where they fall, unless an adjudicator determines otherwise.
[8] Similar arguments were raised in relation to the adjudicator’s failure to make any order concerning the payment of his own costs. The notice of appeal refers in this respect to the separate provision made in s 57 of the Act, but the submissions do not expand on that and it is unnecessary to deal with it in the present context.

The claim for indemnity or increased costs

[9] Ace’s claim for costs of $5,479 is the sum of $4,186 incurred prior to abandonment of the appeal, and $1,293 for preparing its submission seeking costs. The sums sought are set out in a spreadsheet attached to the submissions. They are the actual costs incurred.
[10] Ace’s claim for indemnity costs proceeds on the basis that the appeal was hopeless. The foundation for its argument is s 47(b)(ii) of the Act, which requires that the written determination of an adjudicator must contain the reasons for the determination. Firma would therefore need to contend on appeal that the statutory requirement to give reasons does not relate to costs. This was said to be an argument which had no prospect of success.
[11] Counsel for Firma counters that while s 47(b)(ii) provides that an adjudicator’s determination must contain reasons for the determination:

... the adjudicator declined to exercise his discretion to make any determination under s 56. He therefore did not make a determination regarding that section and was consequently not required to give any reasons at all. In short, the adjudicator left the default position untouched.

[12] In the circumstances of this case the claim for indemnity costs would require a finding by this Court that Firma had “acted vexatiously, frivolously, improperly, or unnecessarily” in commencing the appeal.^[9] It would be rare to reach such a conclusion where an appeal has been withdrawn at a very early stage, and I doubt it would be appropriate here.
[13] However, I consider Firma’s argument that the adjudicator had made no determination under s 56 lacks merit, and is simply wrong. I accept the subsection empowers (but does not oblige) the adjudicator to determine that costs and expenses may be met by any of the parties in the circumstances set out in subs (1)(a)–(b). But a decision that (a) and (b) do not apply is itself a kind of determination, and I can see no valid basis for excluding it from the obligation to give reasons in s 47(1)(b)(ii). I accept that once a decision is made that the circumstances set out in (a) and (b) are not present, the statute dictates that the parties to the adjudication must meet their own costs and expenses, but that does not mean the substantive reasons for the costs decision need not be adequately addressed by the adjudicator. That obligation will be more or less exacting, depending on what is at stake.
[14] Mr Badcock, for Firma, advances no justification for the alternative approach. The idea that the Act’s default position somehow absolves the adjudicator from the need to make a properly reasoned decision under s 56(1) cannot be sustained. I consider it is clear that the legislature must have envisaged the adjudicator would take a reasoned approach to determining issues arising under s 56(1); unless that approach is taken there would be nothing to prevent a capricious outcome.
[15] For these reasons although I reject Ace’s claim to indemnity costs, I consider an award of increased costs will be appropriate. The appropriate provision is r 53E(2)(b)(ii) of the Court of Appeal (Civil) Rules 2005 (the Rules), which contemplates an order being made where an argument lacking merit has been pursued.

Quantum

[16] Mr Badcock contended that costs should not exceed one third of the sum claimable for preparation for the hearing of an appeal in sch 2 of the Rules, a figure of $2,390. He submitted that this would be commensurate with what was done in NMHB Ltd v Concrete Structures (NZ) Ltd, in which the appeal was withdrawn at a later stage than here, and Brown J considered an order for payment of $3,823 ($3,220 + $603) would be appropriate.^[10] Mr Badcock also pointed out that in that case the respondent was entitled to actual and reasonable costs under the Act. He claimed that on the basis of that judgment a total award in this case should not exceed $2,390. He referred to correspondence which he said would have enabled the costs claim to be settled and saved the parties the costs of preparing memoranda on the question of costs. There should be no award for Ace’s costs memorandum, and an award of $478 to Firma for having to deal with the costs issue by memorandum.
[17] That would rather turn responsibility for the situation that has occurred on its head: all costs could have been avoided had Firma not filed an unmeritorious appeal. Although I have rejected the claim for indemnity costs, I have determined that there should be an award of increased costs. The basis for doing that was addressed in Ace’s memorandum. An allowance for that memorandum will be appropriate. Balancing the various considerations, I consider that an appropriate award will be costs of $2,800, with an additional sum of $800 in respect of preparation of the memorandum seeking costs. This is a total of $3,600.

Result

[18] Firma must pay costs of $3,600 to Ace on the abandonment of the appeal, together with any disbursements.
[19] The registrar may pay that amount to Ace’s solicitors out of the funds held as security for costs.

Solicitors:
Badcock Law Ltd, Rotorua for Appellant
Heaney & Partners, Auckland for First Respondent

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^[1] Ace Structural Ltd v Green [2019] NZHC 1558.

^[2] At [11(b)].

^[3] At [11(d)].

^[4] At [11(e)].

^[5] At [64].

^[6] At [40].

^[7] At [53].

^[8] At [64].

^[9] Court of Appeal (Civil) Rules 2005, r 53E(3)(a).

^[10] NMHB Ltd v Concrete Structures (NZ) Ltd [2019] NZCA 179.