Ingram v Patcroft Properties Limited HC Auckland CIV 2006-404-4171 [2010] NZHC 816 (21 April 2010)

Last Updated: 6 June 2010

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

_{CIV 2006-404-4171}

BETWEEN GJ INGRAM & ANOR First Plaintiff

AND KIP INVESTMENTS LTD Second Plaintiff

AND PATCROFT PROPERTIES LIMITED First Defendant

AND JOHN O'DONNELL Second Defendant

Hearing: On the papers

Counsel: D W Grove for plaintiffs

D G Collecutt for defendants

Judgment: 21 April 2010

_{COSTS RULING OF ALLAN J}

Solicitors:

Foy & Halse, Epsom, Auckland

[e-mail] [e-mail]

_{Shean Singh, Dominion Rd, Auckland}

INGRAM & ANOR AND ANOR V PATCROFT PROPERTIES LIMITED AND ANOR HC AK CIV 2006-

404-4171 21 April 2010

[1] In a judgment given on 9 July 2009, I held that the first defendant lessor had repudiated its lease with the plaintiffs, who were in consequence entitled to damages, which I fixed at $136,597.55 for the first plaintiff, and $162,935.04 for the second plaintiff. The first defendant was in turn entitled to recover against the plaintiffs on its counterclaim the sum of $84,906.53. I reserved the question of costs and fixed a timetable for the filing of memoranda.

[2] There were delays in the filing of submissions; Mr Grove’s memorandum in reply was not filed until 30 November 2009.

[3] The memoranda (and in particular that of Mr Collecutt) contained a great deal of arithmetical detail, but also raised several issues of principle. I propose to resolve those issues without attempting to identify the precise costs consequences. Counsel are asked to attend to that. I reserve to all parties the right to raise with the Court any arithmetical issue which counsel are unable to resolve.

The Calderbank letters

[4] On 8 March 2007, the plaintiffs’ solicitors wrote to the solicitors for the defendants, setting out two alternative settlement offers. There was no response to that letter. Mr Grove argues that one or other of the options set out in the letter ought to have been accepted by the defendants, and that the plaintiffs are thereby entitled to increased costs. Upon his calculation, the plaintiffs are entitled, pursuant to Schedule 3 of the High Court Rules, to costs totalling $66,586.88. They have actually incurred costs in excess of $120,000. Mr Grove seeks an order for increased costs in the sum of $85,000.

[5] Express provision for the giving of a Calderbank letter is made in High Court Rule 14.10. Rule 14.11 provides that the effect (if any) that the making of an offer under r 14.10 has on the question of costs is at the discretion of the Court.

[6] Option 1 in the plaintiffs’ solicitor’s letter of 8 March 2007 required both defendants to admit liability in relation to the plaintiffs’ claim. In my judgment I held that the second defendant was under no liability to the plaintiffs.

[7] Option 2 in the letter required payment by the defendants to the plaintiffs of the sum of $600,000. The net amount to which the plaintiffs are entitled pursuant to my judgment does not approach that figure. It cannot be said that the defendants ought reasonably to have accepted either of the options proffered in the letter from the plaintiffs’ solicitors. In my view the Calderbank letter is irrelevant to the assessment of costs.

Plaintiff’s increased costs

[8] It appears that Mr Grove may be seeking increased costs pursuant to r 14.6(3)(b)(ii). His memorandum is not explicit on the point.

[9] Mr Collecutt was briefed only a fortnight or so prior to the trial. He brought a degree of realism to the defendants’ approach to the case, which seems formerly to have been lacking. Several counterclaims by the defendants against the plaintiffs were abandoned at the outset of the trial. They concerned by far the greater part of the sum claimed by the defendants. However, there is nothing before the Court to indicate what precise effect that late abandonment had upon the plaintiffs’ costs (for example by increasing their preparation costs). Moreover, the plaintiffs themselves sought to introduce an unpleaded waiver argument at the commencement of the trial. That may well have increased the defendants’ ultimate costs.

[10] I am not prepared to award the plaintiffs increased costs pursuant to r 14.6(3)(b)(ii).

First defendant’s increased costs

[11] The first defendant seeks increased costs on its counterclaim by reason of clause 17 of the lease, which provides for the recovery of all costs incurred by the

lessor in the exercise or attempted exercise of its rights under the lease, or which the lessor may incur in connection with, or arising out of the lease, or in suing for the rent or any other moneys payable under the lease to the lessor for breach of any covenant contained in the lease.

[12] Although Mr Collecutt accepts that part of the legal costs incurred by the first defendant relate to matters upon which it was unsuccessful at trial (including those associated with resolving issues relating to the value of the plaintiff’s business), nevertheless, evidential issues in relation to the counterclaim were closely entwined with issues in relation to the plaintiff’s claim. Mr Collecutt argues that two-thirds of the total costs incurred by the first defendant were incurred by the lessor in terms of clause 17 (in other words they were associated with the exercise or attempted exercise of its rights under the lease). Accordingly, he seeks two-thirds of the actual costs incurred by the first defendant.

[13] In Watson & Son Ltd v Active Manuka Honey Association [2009] NZCA 595 the Court of Appeal held that the Association was entitled to solicitor-client costs for legal expenses incurred while the licence agreement was in existence, but not for solicitor-client costs incurred after the agreement was terminated, save in respect of costs related to a breach by the licensee prior to termination. That was a case of termination by notice, not of repudiation.

[14] I have held that the first defendant repudiated the lease on 14 June 2005, and that such repudiation was accepted by the plaintiffs’ conduct shortly thereafter. The lease was thereby cancelled. Section 8(3)(a) of the Contractual Remedies Act 1979 thereupon operated to release the plaintiffs from any obligation to pay the landlord’s solicitor-client costs in respect of steps taken by the landlord post cancellation.

[15] The first defendant is not therefore entitled to rely on clause 17, and is not entitled to solicitor-client costs against the plaintiffs.

The second defendant’s costs

[16] Mr O’Donnell, the second defendant, was a director of the first defendant. The plaintiffs contended that because he was the person who attended the demised premises and physically took possession of them on 14 June 2005, he was equally liable to the plaintiffs. I rejected that submission. There was nothing in the evidence to suggest that Mr O’Donnell was doing anything more than carrying out his duties as a director of the first defendant.

[17] Both defendants were represented by the same solicitors and counsel. Instructions from the first defendant were conveyed throughout by the second defendant.

[18] Mr Collecutt contends that the claim against the second defendant was hopeless from the outset and should never have been brought; that the claim for exemplary damages against the second defendant entailed a substantial attack on his reputation, and that in consequence, the second defendant ought to have a separate award of costs.

[19] There is no evidence as to the additional work to which solicitors and counsel were put by reason of the defence of the claim against the second defendant. On the face of it, all that was required was the presentation of legal argument in respect of the legal liability of the defendant in the circumstances of this case. All the evidence called by the defendants was necessary in any event in order to meet the claim against the first defendant.

[20] Rule 14.15 provides that the Court must not allow more than one set of costs unless it appears that there is good reason to do so. Reputational issues will sometimes constitute a sufficient reason. But r 14.15 is concerned with the separate representation of defendants. Here, the defendants were represented by the same solicitors and counsel. Their interests almost completely overlapped.

[21] Mr Collecutt places reliance on the decision of the Court of Appeal in

Bradbury v Westpac Banking Corporation [2009] 3 NZLR 400, although accepting

that there are plain differences between that case and this one. He argues that the second defendant is entitled to indemnity costs because the plaintiffs:

a) made serious allegations of misconduct against him, so impugning his character while knowing the allegations to be false or without substance;

b) commenced or continued proceedings against him with the ulterior motive of inducing him in his role of director to cause the first defendant to settle the proceeding;

c) commenced or continued the proceeding against the second defendant in wilful disregard of the fact that the second defendant had acted on legal advice throughout, and that accordingly the claim against him personally was without merit;

d) pursued a claim against him that was hopeless.

[22] Most of these claims are unsubstantiated. I do not regard this case is comparable to Bradbury in any meaningful sense. Although Mr Collecutt points out that the first defendant’s legal representatives required the second defendant to make himself personally liable for the costs of the litigation, that is simply a commonplace incident of litigation of this type and would have occurred whether or not the second defendant was named as a party. The first defendant was the vehicle by which the second defendant chose to conduct business as a landlord.

[23] In cases where one defendant is successful, but the other fails, costs orders will ordinarily be based on an assessment of the overall justice of the case as between the plaintiff and the two defendants. Relevant considerations will include the reasonableness of the plaintiff initially suing both defendants, the extent to which each defendant contributed to that decision, any change in position or material development in the proceeding, and the extent to which the plaintiff succeeded: Lane Group Ltd v D I & L Patterson Ltd [2000] 1 NZLR 129 at [83]-[84].

[24] In the present case, for the reasons I have earlier outlined, I consider that the defendants should have one set of costs only. Alternatively it seems to me that, had any order for costs been made in favour of the second defendant, it would have been proper to direct that they be paid by the first (unsuccessful) defendant: Sanderson v Blyth Theatre Co [1903] 2 KB 533, given that the second defendant was the alter ego of the first defendant.

Liability for interest

[25] There is a measure of agreement in respect of interest on some of the items which comprise the various judgment sums. The defendants agree that interest runs on the first plaintiff’s losses from 14 June 2005, on the Lion Breweries’ loan component of the second plaintiff’s losses of $62,935.04 from 22 December 2005, and on the balance of the second plaintiff’s losses ($100,000) from 14 June 2005.

[26] But there is no agreement in respect of the calculation of interest on the various amounts which make up the figure for which the first defendant is entitled to judgment. The first of those items concerns a sum of $60,000 which I have held the first defendant to be entitled to recover in respect of the cost of the removal of a creeper vine from the exterior of the building.

[27] Mr Collecutt argues that the liability of the plaintiffs to repair the creeper vine damage had accrued by 14 June 2005, the date upon which the lease came to an end. But in fact the creeper vine damage was never repaired by any party to the proceeding. Instead, the first defendant negotiated a reduction of $60,000 in the purchase price of the premises. In my opinion, interest on the sum of $60,000 runs only from 20 April 2007, being the date upon which the first defendant sold the premises. Only then did it incur the loss, by receiving $60,000 less from the vendor than would have been the case had the damage not occurred.

[28] The next item is a figure of $1344.38, in respect of unpaid costs arising from an earlier arbitration between the parties. Mr Collecutt argues that interest should run on that sum from 7 March 2003, being the date of the award. But as Mr Grove points out, the defendants’ pleading in the present proceeding was to the effect that

that sum was to be offset against an overpayment for rent. Moreover, no demand for payment was made until after the proceeding had been issued. I do not consider that this sum ought to carry interest prior to judgment.

[29] The next item concerns a figure of $18,337.50 awarded in respect of unpaid repair and maintenance costs to a light well. That sum was invoiced to the plaintiffs on 15 May 2003. A further demand for payment was made in a letter from the first defendant’s solicitors on 23 July 2003. The position in respect of these costs is different from the unpaid arbitration costs, in that formal demand was made on the plaintiffs in the latter case but not the former. Interest is payable on the sum of

$18,337.50 as from 15 May 2003.

[30] The next item is a figure of $2974.75, being the balance of unpaid rental and operating expenses for the period 1 to 14 June 2005. As Mr Collecut submits, these sums were due on 1 June 2005 and interest must run as from that date.

[31] Finally, there is the figure of $2249.90, being an amount representing an unpaid proportion of rent for April 2005. This figure represented an increment on the rent otherwise payable for that month, by reason of the landlord’s demand for increased rental in terms of clause 24 of the lease. The amount of the increase became payable on 1 May 2005, subject to later adjustment between the parties if the lessee’s objection succeeded. Accordingly, interest runs on the unpaid proportion of rent for April 2005, as from 1 May 2005.

Interest rate

[32] There is also a significant dispute as to the appropriate rate of interest. Under clause 25(a) of the lease, the lessor was entitled to penalty interest on unpaid rent or other moneys owing by the lessee to the lessor pursuant to the lease, at a stipulated penalty rate where default exceeded 14 days. Mr O’Donnell’s evidence was that the penalty rate under the lease was 23.75%.

[33] Mr Collecutt argues that the lease did not provide that the right to recover penalty interest ceased on the date of termination of the lease, but rather that it

continued to accrue until payment in full was received by the lessor. Accordingly, he argues that penalty interest continued to accrue up to the date of judgment. He relies on the Court of Appeal’s decision in Hard to Find But Worth the Effort Quality Secondhand Books (Wellington) Ltd (in liq) v He [2009] 1 NZLR 626. There the landlord was entitled to rental up to the date upon which the lease relationship came to an end and to contractual interest pursuant to the lease on that sum to the date of judgment. Mr Collecutt suggests that that case was analogous to this, but as Mr Grove observes, that was a case in which the tenant had effectively abandoned the lease. The lessor had not, as here, repudiated it.

[34] Section 8 of the Contractual Remedies Act 1979 provides:

8 Rules applying to cancellation

(1) The cancellation of a contract by a party shall not take effect—

(a) Before the time at which the cancellation is made known to the other party; or

(b) before the time at which the party cancelling the contract evinces, by some overt means reasonable in the circumstances, an intention to cancel the contract, if—

(i) it is not reasonably practicable for the cancelling party to communicate with the other party; or

(ii) the other party cannot reasonably expect to receive notice of the cancellation because of that party's conduct in relation to the contract.

(2) The cancellation may be made known by words, or by conduct evincing an intention to cancel, or both. It shall not be necessary to use any particular form of words, so long as the intention to cancel is made known.

(3) Subject to this Act, when a contract is cancelled the following provisions shall apply:

(a) So far as the contract remains unperformed at the time of the cancellation, no party shall be obliged or entitled to perform it further:

(b) So far as the contract has been performed at the time of the cancellation, no party shall, by reason only of the cancellation, be divested of any property transferred or money paid pursuant to the contract.

(4) Nothing in subsection (3) of this section shall affect the right of a party to recover damages in respect of a misrepresentation or the repudiation or breach of the contract by another party.

[35] I have found that the landlord repudiated the lease on 14 June 2005. The precise date of cancellation is unknown, but in the circumstances of this case the plaintiffs must be taken to have cancelled shortly after that date. The failure of the plaintiffs to take any step to apply for relief against forfeiture (against the background of the lessor’s intimated intention to resist any such application) must have been taken by the first defendant as an acceptance of the repudiation.

[36] Section 8(3)(a) of the Contractual Remedies Act provides that following cancellation no party shall be obliged or entitled to perform it further. The obligation to pay penalty interest is covered by s 8(3)(a). I refer to two analogous cases. The first is New Zealand Trustees Ltd v Stiassny [1994] 2 NZ ConvC

191,809. There, the plaintiff vendor of an office building failed to comply with a special condition in the contract relating to water proofing, so breaching the contract. The defendant purchaser refused to settle. The plaintiff sued the defendant for penalty interest accruing from the stipulated settlement date.

[37] The Court held that in the light of the breach the purchaser would have been entitled to cancel the contract pursuant to s 7(3) and (4) of the Contractual Remedies Act 1979. The vendor therefore was not entitled to interest from the purchaser for failure to settle. The purchaser’s obligation to pay the full purchase price on the due date did not arise when the vendor was in default of the condition of the contract, for breach of which the purchaser was entitled to cancel.

[38] The second case is Watson & Son Ltd v Active Manuka Honey Association. There, as earlier noted, the Court of Appeal held that a contractual right to solicitor- client costs comes to an end upon termination of the contract, save in respect of costs arising from prior breaches by the other party to that contract.

[39] In my view, the appropriate course is to hold that the lessor is entitled to penalty interest on qualifying items up to 14 June 2005, but not thereafter. That finding is a necessary consequence of the provisions of s 8(3)(a) of the Contractual

Remedies Act, and of my finding that the first defendant repudiated its lease with the plaintiffs on 14 June 2005, such repudiation having been accepted by the plaintiffs’ subsequent conduct.

[40] It follows that the first defendant is not entitled to penalty interest at all in respect of the cost of removal of the creeper vine. The landlord’s loss in respect of that item was not incurred until April 2007 when it sold the premises.

[41] Apart from that item, the lessor is entitled to interest on those items which carry interest at the penalty rate up to 14 June 2005, and then at the statutory rate thereafter.

Conclusion

[42] In this ruling I have endeavoured to cover all issues of principle raised in counsels’ memoranda. If I have overlooked anything, or if counsel require further assistance on the arithmetical calculations flowing from this ruling they may file further memoranda.

[43] Counsel will no doubt bear in mind the provisions of rr 14.16 and 14.17 in respect of the final calculation of costs and the set off of the respective costs awards for the purposes of sealing an order as to costs.

C J Allan J