Devich v AMI Insurance Limited HC Auckland CIV-2009-404-5567 [2011] NZHC 1703 (8 November 2011)

Last Updated: 5 December 2011

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

_{CIV-2009-404-5567}

BETWEEN PR DEVCICH & ORS AS TRUSTEES OF THE PAUL DEVCICH FAMILY TRUST AND JJ DEVCICH & ORS AS TRUSTEES OF THE JANICE DEVCICH FAMILY TRUST

First Plaintiffs

AND PR DEVCICH AND JJ DEVCICH Second Plaintiffs

AND AMI INSURANCE LIMITED Defendant

Hearing: On the papers

Counsel: C M Brick for PR and JJ Devcich

D M Salmon for G Cheyne and S Costello

C R Johnstone for defendant

Judgment: 8 November 2011 at 3:15 PM

JUDGMENT OF LANG J [on costs]

This judgment was delivered by me on 8 November 2011 at 3.15 pm, pursuant to Rule

11.5 of the High Court Rules.

Registrar/Deputy Registrar

_{Date...............}

DEVCICH & V AMI INSURANCE LIMITED HC AK CIV-2009-404-5567 8 November 2011

[1] On the morning of 24 April 2009 a fire broke out in a residential dwelling owned by the plaintiffs, the trustees of the Paul Devcich Family Trust and the Janice Family Trust. The fire caused reasonably extensive damage to several areas of the house before it could be extinguished. The plaintiffs sought to recover the cost of repairing the house from the defendant (“AMI”), with whom they held a fire insurance policy.

[2] AMI declined the plaintiffs' claim on the basis that it believed that one of the owners of the property, Mr Paul Devcich, was the person responsible for lighting the fire. The plaintiffs then filed this proceeding seeking to enforce their claim for indemnity under the policy. AMI defended the claim on the same basis as it had declined to provide cover under the policy.

[3] On 20 July 2010 I delivered a judgment in which I determined that AMI was liable to the plaintiffs under the insurance policy.[1] On 14 June 2011, however, the Court of Appeal allowed AMI’s appeal against my judgment.[2] The Court of Appeal considered that my factual findings ought to have led me “inexorably to the conclusion that [AMI] had made out its case against the plaintiffs.”[3] It therefore entered judgment in favour of AMI. The Court of Appeal also ordered the plaintiffs to pay AMI’s costs on the appeal, and directed that costs in this Court were to be determined by this Court in light of the Court of Appeal’s judgment.[4]

[4] On 30 August 2011 the Supreme Court dismissed the plaintiffs’ application for leave to appeal against the judgment of the Court of Appeal.[5] It, too, directed the plaintiffs to pay AMI’s costs on the application for leave to appeal.

[5] It is now necessary for me to fix costs in this Court having regard to the conclusions reached by the Court of Appeal and the Supreme Court.

The arguments

[6] AMI contends that it should have a joint and several award of costs against all plaintiffs on an indemnity basis. It has incurred legal costs and disbursements amounting to approximately $312,000 in defending the plaintiffs' claim. Costs and disbursements on a category 2B basis would amount to approximately $121,000, or just over one-third of the actual costs that AMI has incurred. If Band C is applied in relation to the preparation of witness statements, as both parties consider to be appropriate, this figure rises slightly to approximately $124,700.

[7] AMI submits that the plaintiffs prosecuted a claim that they knew was based on a false premise, namely that a person other than Mr Devcich was responsible for setting the property alight. AMI says that the plaintiffs’ decision to issue and continue a proceeding seeking indemnity under the insurance policy in those circumstances amounted to fraudulent conduct, and that indemnity costs are therefore appropriate. In the alternative, AMI seeks an order for increased costs. It strongly opposes any suggestion that the order for costs should differentiate between individual plaintiffs.

[8] Mr and Mrs Devcich accept that AMI is entitled to an award of costs against them on a Category 2B basis. They resist AMI’s assertion that costs should be increased, or that they should be awarded on an indemnity basis. They submit that AMI did not prove its claim against Mr Devcich to the criminal standard, and that the Court should be hesitant before awarding indemnity costs in such circumstances.

[9] In the alternative, Mr and Mrs Devcich submit that increased or indemnity costs should only be awarded against Mr Devcich. They point out that he alone was responsible for the acts may justify increased or indemnity costs. They also point out that Mrs Devcich was overseas when the fire occurred, and that there is no reason to believe that she was ever aware that her husband was responsible for starting the fire. They say that it was reasonable for Mrs Devcich to rely upon her husband’s assertion that someone other than him was responsible for starting the fire.

[10] The other two plaintiffs, Mr Cheyne and Ms Costello, are the remaining trustees of Mr and Mrs Devcich’s family trusts. Their counsel submits that they were unaware that the claim against AMI was made fraudulently, and they left the prosecution of the proceeding entirely to Mr and Mrs Devcich. Moreover, they were not aware that they might be personally liable for any costs awarded against the plaintiffs in the event that the claim did not succeed. They therefore contend that any award of costs against them should be limited to the assets of the trusts of which they are trustees.

Jurisdiction

[11] All matters in relation to costs are at the discretion of the Court.[6] The Court is required, however, to have regard to the general principles set out in r 14.2. To the forefront of these is the principle that the party who fails with respect to a proceeding should pay costs to the party who succeeds.[7]

[12] Generally speaking, costs should be assessed by applying the appropriate daily recovery rate to the time considered reasonable for each step reasonably required in the proceeding.[8] The Court may, however, order an unsuccessful party to pay increased costs or indemnity costs. Rule 14.6 provides the Court with jurisdiction to make such an order. It provides:

14.6 Increased costs and indemnity costs

(1) Despite rules 14.2 to 14.5, the court may make an order—

(a) increasing costs otherwise payable under those rules (increased costs); or

(b) that the costs payable are the actual costs, disbursements, and witness expenses reasonably incurred by a party (indemnity costs).

...

_{(3) The court may order a party to pay increased costs if—}

(a) the nature of the proceeding or the step in it is such that the time required by the party claiming costs would substantially exceed the time allocated under band C; or

(b) the party opposing costs has contributed unnecessarily to the time or expense of the proceeding or step in it by—

(i) failing to comply with these rules or with a direction of the court; or

(ii) taking or pursuing an unnecessary step or an argument that lacks merit; or

(iii) failing, without reasonable justification, to admit facts, evidence, documents, or accept a legal argument; or

(iv) failing, without reasonable justification, to comply with an order for discovery, a notice for further particulars, a notice for interrogatories, or other similar requirement under these rules; or

(v) failing, without reasonable justification, to accept an offer of settlement whether in the form of an offer under rule

14.10 or some other offer to settle or dispose of the proceeding; or

(c) ...

(d) some other reason exists which justifies the court making an order for increased costs despite the principle that the determination of costs should be predictable and expeditious.

(4) The court may order a party to pay indemnity costs if—

(a) the party has acted vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing, or defending a proceeding or a step in a proceeding; or

(b) the party has ignored or disobeyed an order or direction of the court or breached an undertaking given to the court or another party; or

(c) costs are payable from a fund, the party claiming costs is a necessary party to the proceeding affecting the fund, and the party claiming costs has acted reasonably in the proceeding; or

(d) the person in whose favour the order of costs is made was not a party to the proceeding and has acted reasonably in relation to it; or

(e) the party claiming costs is entitled to indemnity costs under a contract or deed; or

(f) some other reason exists which justifies the court making an order for indemnity costs despite the principle that the determination of costs should be predictable and expeditious.

Decision

Mr Devcich

[13] The judgments of the Court of Appeal and the Supreme Court mean that AMI has established to the required standard that Mr Devcich deliberately set fire to the plaintiffs' property. He also caused the plaintiffs to lodge a claim under the AMI insurance policy for the resulting losses. When AMI declined the claim, Mr Devcich instructed solicitors to file this proceeding in an attempt to enforce the claim for indemnity. Mr Devcich took that step notwithstanding the fact that he must have known that the plaintiffs were not entitled to indemnity under the policy. Mr Devcich and the other plaintiffs then pursued their claim through to trial. Their principal factual witness was Mr Devcich, who vigorously denied that he had started the fire.

[14] I consider that Mr Devcich’s actions give rise to jurisdiction under r 14.6(4)(a) to require Mr Devcich to pay indemnity costs on the basis that he acted vexatiously, frivolously, improperly or unnecessarily in causing the plaintiffs to continue the proceeding. It is obviously vexatious, frivolous, improper and unnecessary for a plaintiff to institute and prosecute a proceeding that he or she knows is based on a completely false assertion of fact.

[15] Mr Devcich’s actions also, in my view, give rise to jurisdiction to order indemnity costs under r 14.6(4)(f). In Bradbury v Westpac Banking Corporation, the Court of Appeal said:[9]

[28] ... Indemnity costs, which depart from the predictability of the Rules Committee’s regime, are exceptional and require exceptionally bad behaviour. That is why to justify an order for such costs the misconduct must be “flagrant” [Prebble v Awatere Huata (No 2) [2005] 2 NZLR 467 (SC) at [6]].

[29] We therefore endorse Goddard J’s adoption in [Hedley v Kiwi Co- operative Dairies Ltd (2002) 16 PRNZ 694 (HC) at [11] of Sheppard J’s summary in [Colgate-Palmolive Company v Cussons (1993) 46 FCR at 232-

234]. While recognising that the categories in respect of which the discretion may be exercised are not closed (see r 14.6(4)(f)), it listed the

following circumstances in which indemnity costs have been ordered:

(a) the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud;

(b) particular misconduct that causes loss of time to the court and to other parties;

(c) commencing or continuing proceedings for some ulterior motive;

(d) doing so in wilful disregard of known facts or clearly established law; or

(e) making allegations which ought never to have been made or unduly prolonging a case by groundless contentions, summarised in French J’s “hopeless case” test.

[30] Each of these concerns conduct which would fall within r 14.6(4). ...

[16] I consider that the filing and prosecution of a proceeding seeking to enforce a fraudulent insurance claim constitutes misconduct that can properly be described as “flagrant” in terms of the passage set out above.

[17] For these reasons, I accept AMI’s submission that Mr Devcich should be required to pay costs on an indemnity basis.

Mrs Devcich

[18] The same considerations do not apply to Mrs Devcich. There is no evidence to suggest that she ever knew that her husband’s version of events was false. It was only proved to be false through judicial analysis of the evidence adduced at trial. In those circumstances, I see no basis to award indemnity or increased costs against Mrs Devcich under r 14.6(3) and (4).

[19] Instead, she should be required to pay costs calculated on a Category 2B

basis, but with Band C to apply in respect of the preparation of witness statements.

Mr Cheyne and Ms Costello

[20] Mr Cheyne and Ms Costello have confirmed through their counsel that they were aware of the proceeding from discussions they held with Mr and Mrs Devcich. They must therefore be taken to have agreed to act as plaintiffs.

[21] Any person who agrees to be named as a plaintiff in a civil proceeding thereby submits to the Court’s discretion to make an award of costs at any stage of the proceeding. A person who agrees to be named as a plaintiff in his or her capacity as a trustee is in exactly the same position in relation to costs as any other plaintiff. Although Mr Cheyne and Ms Costello may not have appreciated the consequences that their status as plaintiffs might produce, that fact should not affect their potential liability to pay costs in the event that the proceeding was unsuccessful.

[22] The general principle is that a trustee is personally liable to third parties in respect of actions taken whilst carrying out the terms of the trust. The trustee may, in appropriate cases, have a right of indemnity against trust assets in respect of such liability.[10] That fact does not, however, provide a defence to a claim by a third party.

[23] It was always open to Mr Cheyne and Ms Costello to make their own enquiries in respect of the merits of the claim, and/or the likelihood that they would be able to recoup any adverse award of costs from the trusts’ property. If those enquiries left them feeling uncomfortable about their potential exposure, they would have been left with several options. In particular, they could withdraw their consent to the continued prosecution of the proceeding. If the remaining trustees did not agree to the discontinuance of the proceeding, they could have resigned and sought to have their names removed as plaintiffs.

[24] Mr Cheyne and Ms Costello have not cited any authority to support their submission that, because they acted in the capacity as trustees, their liability for costs

_{should be limited to the assets of the trusts. Moreover, the Court of Appeal and}

Supreme Court saw no reason to distinguish between the individual plaintiffs in that way. I consider it appropriate to take the same approach in relation to costs in this Court.

[25] Like Mrs Devcich, Mr Cheyne and Mr Costello are therefore to be subject to an award of costs on a Category 2B basis, but with Band C to apply relation to the preparation of witness statements. I decline to direct that their liability is limited to the assets of the trusts of which they are trustees.

Orders

[26] I direct:

(a) AMI is entitled to an award of costs on an indemnity basis against Mr

Devcich in respect of all steps taken in this proceeding.

(b) AMI is entitled to an award of costs on a Category 2B basis against all other plaintiffs, but with Band C to apply in respect of the preparation of witness statements.

[27] AMI is also entitled to its reasonable disbursements. I take it from the latest memorandum of counsel for AMI that disbursements are now agreed. If that is not the case, counsel should file memoranda within the next seven days indicating which

_{items remain in dispute.}

Lang J

Solicitors:

Jones Fee, Auckland

Lee Salmon Long, Auckland

Wynn Williams & Co, Christchurch

---

[1] _{P R Devich & Ors v AMI Insurance Ltd HC Auckland CIV-2009-404-5567, 20 July 2010.}
[2] _{AMI Insurance Ltd v P R Devcich & Ors [2011] NZCA 266}
[3] _{At [106].}
[4] _{At [111].}
[5] Devcich v AMI Insurance [2011] NZSC 98.
[6] _{High Court Rules, r 14.1.}
[7] _{R 14.2(a).}
[8] R 14.2(c).

[9] Bradbury v Westpac Banking Corporation [2009] NZCA 234; [2009] 3 NZLR 400.

[10] Trustee Act 1956, s 38(2). See also Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Brookers, Wellington, 2009) at 441-444.