Shoye Venture Limited v Wilson [2014] NZHC 1636 (11 July 2014)

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BETWEEN	SHOYE VENTURE LIMITED Plaintiff
AND	DONALD GORDON WILSON Defendant
AND	MANUKAU GOLF CLUB INCORPORATED Third Party _{Continued over}

Hearing:	On the Papers
Counsel:	M R T Colthart for the Plaintiff in Proceeding CIV-2009-404- 007912 and for the Defendant in Proceeding CIV-2010-404- 004422 A E Hansen for the Defendant in Proceeding CIV-2009-404- 007912 and for the Plaintiff in Proceeding CIV-2010-404- 004422 I T F Hikaka and K L J Simcock for the Third Party in Proceeding CIV-2009-404-007912
_Judgment:	_{11 July 2014}

This judgment was delivered by Justice Duffy on 11 July 2014 at 2.00 pm, pursuant to

Counsel: M R T Colthart P O Box 535 Shortland Street Auckland 1140 for the Plaintiff in

Solicitors: Heimsath Alexander P O Box 105884 Auckland City Auckland 1143 for the Defendant in Proceeding CIV-2009-404-007912 and for the Plaintiff in Proceeding CIV-2010-404-004422

[1] On 28 March 2013, I delivered a judgment in these consolidated proceedings (Shoye Venture Ltd v Wilson [2013] NZHC 658) in which I found that the plaintiff (“Manukau”) and the defendant (“Shoye”) were unsuccessful in their claims against each other. In that judgment, I determined that:

(a) The illegal de facto way in which the parties went about the operation of the gaming machines at the Trophy Bar was an implicit abandonment of the legal contractual arrangements as approved by the Department of Internal Affairs;

(c) Manukau was not able to sue Shoye for breaches of the original venue agreement, and Shoye was likewise precluded in respect of its claims, it being a willing participant in what had taken place.

[2] The other claims that were made by Shoye were either similarly impugned by the illegality, or were not made out, or were for losses that were not properly claimable.

[3] Following the delivery of my judgment, Manukau seeks costs against Shoye. Manukau’s application for costs is reliant on Calderbank offers that were made to Shoye. Those offers were rejected.

[4] By letter dated 11 May 2012, Manukau proposed a “walk away solution” for the proceedings. Manukau offered to discontinue its claims in the proceedings against Shoye if Shoye would also agree to discontinue its claim against Manukau, with costs lying where they fell.

[5] Then, by letter dated 18 May 2012, Manukau offered Shoye $50,000 to resolve all issues between the parties.

[6] Manukau contends the Calderbank offers were made at a point in time where both parties knew their legal positions. The letters were written after:

(b) A summary judgment proceeding that had seen the ventilation of the relevant legal issues in the High Court;

[7] Manukau submits that given the Calderbank offers, the Court should depart from the normal rule that where the claims of opposing parties have failed, costs should lie where they fall.

... it is a requirement of fairness that litigants – particularly defendants – have some economic means of limiting their exposure to the risk of costs; and secondly the Court itself must ensure that a procedure of this character operates as an effective encouragement to settle.

[9] Calderbank offers are provided for in r 14.10 of the High Court Rules. In the present case, Manukau argues that in the Court’s overriding discretion, Manukau should be entitled to costs under r 14.11 because:

(a) The first Calderbank offer would have been more beneficial to Shoye than the judgment Shoye obtained. Had Shoye accepted the offer, it would have avoided its own costs of trial; and

(b) The second Calderbank offer actually offered a sum of money to Shoye. If that offer had been accepted, Shoye would have obtained the benefits of saving its own costs and would also have received a not insubstantial sum.

[10] In its costs submissions, Shoye opposes any award of costs to Manukau. Shoye submits that the Calderbank offers were made by Manukau shortly before trial and this is a relevant consideration in terms of rr 14.10 and 14.11.

[11] Shoye submits that, viewed in context, it did not act unreasonably in rejecting Manukau’s settlement offers prior to trial. Further, Shoye says that while Manukau’s settlement offers are a relevant consideration, their rejection by Shoye does not justify an award of costs to Manukau in the circumstances of this case. It submits that as both parties have been unsuccessful in their respective claims against each other, costs ought to lie where they fall.

[12] Manukau refers to the fact that the two Calderbank offers were made within a week of each other in mid May 2012, approximately one month out from the hearing.

[13] Shoye refers to the commentary on r 14.11 (McGechan on Procedure (online looseleaf ed, Brookers) at [HR14.1101], which states that when considering the effect of a Calderbank offer, the Court is required to take into account all relevant circumstances in the exercise of its discretion. Shoye also refers to the decision of Rodney Hansen J in McDonald v FAI (NZ) General Insurance Co Ltd (2002) 16

The reasonableness or otherwise of the plaintiff’s response to the settlement offer must be considered against the amount of his claim, his reasonable expectations and, importantly, the information available to him which would enable him to assess the offer.

[14] In the present case, Shoye argues that the following factors are relevant to the Court’s assessment. The first offer Manukau made was an offer to discontinue the claim against Shoye on the basis that Shoye discontinued its counterclaim against Manukau. Shoye submits the offer did not contain any consideration for the costs incurred by Shoye in defending Manukau’s claim, or any consideration for Shoye to drop its counterclaim.

[15] In its second offer, Manukau repeated the first offer and, in addition, offered the sum of $50,000 to Shoye. The intent of the $50,000 was not specified. Shoye

says it could either be seen as a contribution to the legal costs incurred by Shoye in defending Manukau’s claim to that point, or as an offer to settle Shoye’s counterclaim, or most likely as a combination of both.

[16] Shoye argues that the second offer was made at a time when the trial was scheduled to begin some three weeks away. Shoye had incurred legal costs in defending Manukau’s claim to that point in excess of the amount offered by Manukau. At the point the second offer was made, Shoye would have been entitled to claim scale costs on the discontinuance of Manukau’s claim, which amounted to

$16,732. Shoye argues that if the second offer is viewed as an offer to settle Shoye’s counterclaim, the practical effect of the offer after an allowance is made for Shoye’s costs entitlement on the discontinuance of Manukau’s claim was an offer of $33,268.

[17] Shoye argues that in terms of the information available to it to assess the merits of the offer at the time it was made:

(a) Shoye did not view Manukau’s offer to discontinue its claim as being of any substantial value to Shoye. Shoye held to the view that Manukau’s claim did not have merit and would ultimately be dismissed. This was a view shared by Associate Judge Bell when he entered summary judgment against Manukau and was also accepted by the High Court at trial.

(b) Secondly, although the High Court found at trial that some of the losses claimed by Shoye were too remote, the majority of the counterclaim related to the loss of the value of the Trophy Bar business ($337,500), and the income and additional amounts payable under the terms of the lease of the bar ($366,565.07). Shoye says it had lost its entire business as a result of its dealings with Manukau. So although its claims for the losses were dismissed by the Court, they were claims which, in the absence of a meaningful settlement offer, Shoye felt strongly that it was entitled to take to trial.

(c) Thirdly, Shoye did not view Manukau’s offer of $50,000, including costs, as a substantial and meaningful offer. Contrary to the position with respect to Manukau’s claim, there had been no judicial indications as to the merits of Shoye’s counterclaims prior to trial.

[18] Shoye submits that bearing all of those matters in mind, and considering the position as known to Shoye in mid May 2012, it did not act unreasonably in rejecting Manukau’s offers.

[19] Following receipt of the costs memorandum last year, I issued a Minute requesting the parties to address the impact that the findings of illegality had on the application for costs. Regrettably, due to an oversight in this Court’s Registry, Manukau’s further memorandum addressing the matter that I had raised was not drawn to my attention until very recently. Shoye chose not to address this matter and so no further submissions were filed by it.

[20] In the later memorandum, Manukau submits that the fact a proper and well placed Calderbank offer was made before trial remains relevant, despite the findings of illegality.

[21] Manukau submits that there is no fixed rule that a finding of illegality in respect of the subject matter of litigation serves to absolutely disentitle the party to costs, or to exclude normal principles relevant to the consideration of costs. Manukau does not dispute the finding of illegality, but argues that the following principles ought to be taken into account:

(a) The outcome of the litigation insofar as the Court has seen it as appropriate to achieve a just outcome between the parties, despite the illegality;

(b) That ordinary costs principles relating to the conduct of the litigation ought to apply, as illegality will have limited impact on the parties’ conduct of the proceedings; and

(c) That ordinary costs principles relating to the conduct of the litigation ought to apply as the systemic benefits flowing from the application of ordinary costs principles will not be affected by the illegality.

[22] Manukau submits that in the present case, both parties were active in the illegal de facto conduct that superseded the written arrangements that were put in place. The outcome of the litigation has left each party without what they sought. In setting aside the illegality, the justice of the case cannot have been said to favour either party.

[23] Manukau accepts that in cases of particularly flagrant illegality, the Court may be justified in holding that deprivation of costs represents a further sanction of the illegality of the transaction. Manukau submits that in this case, there was no reason to suggest that the illegality is of such nature as to justify further penalty to Manukau.

[24] Manukau submits that the applicability of ordinary costs principles, including, in this case, the Calderbank rule, can be justified in a number of ways:

(a) Illegality is normally likely to be a matter of pleading, legal argument, and as a reason for judgment. It will have little bearing on the conduct of the litigation itself, so parties will normally be expected to conduct themselves within the normal framework of compliance and costs sanctions that exist in the Court’s civil jurisdiction; and

(b) An allegation of illegality and an eventual finding to that effect should not be expected to alter the process, incentives and strategic tools offered to parties to find a way to resolve their own disputes and the benefit to litigants in the Court system that flows from resolution.

[25] Manukau acknowledges that had the Calderbank proposals not been made, it would have no basis for making a costs application. It submits that the Calderbank proposals were made properly and sensibly by Manukau as it advanced its own assessment of the likely post-trial outcome before the case went to trial. The Calderbank proposals were made against a significant and large counterclaim by Shoye for sums that by and large were unsustainable and unprincipled. Those claims all failed.

[26] Manukau submits that the way it approached this litigation and the proper and, with hindsight, generous Calderbank proposal it made to Shoye is conduct that the Court should want to encourage. It contends that in every sense, Shoye gambled on the outcome of the trial process and failed.

[28] The illegal contract in this case was an illegal gambling contract. By means of the Gaming Act 2003, Parliament has sought to control illegal gambling. There are sound public policy reasons for why parties who engage in illegal gambling in contravention of the Gaming Act should not be permitted to enjoy benefits from doing so. Applying those principles would lead me to conclude that costs should lie where they fall. However, I find Manukau’s arguments regarding the special status of Calderbank offers to be convincing.

[29] The outcome was a no win result for either party. Going to trial was a costly waste of time for the parties, and it deprived other users of the Court of valuable hearing time. Had Shoye accepted Manukau’s offers, that could have been avoided. Whilst there are sound public policy reasons to disincentivise illegal gambling, there are equally sound public policy reasons for encouraging efficient and proper use of Court hearing time.

[30] I am satisfied that the conduct on the part of Manukau in making two Calderbank offers requires recognition. Further, whilst the Calderbank offers were made close to trial, the second Calderbank offer would certainly have placed Shoye in a better position than the position it was in after judgment.

[31] Shoye may have been confident about its case in the lead-up to the hearing. However, its subjective views on the merits of its case and its entitlement to take its case to trial seem to me to be irrelevant when it comes to assessing whether or not a Calderbank offer will give rise to costs. The simple fact is that the second offer made by Manukau would have placed Shoye in a much better position than the judgment. Given the illegal nature of the relevant agreements, Shoye’s counterclaim was hopeless.

[32] The purpose of r 14.10 is to encourage parties to make realistic assessments of the benefits of going to trial. Those who proceed to trial in the face of settlement offers that would, on my objective assessment, be seen to place them in a better position than they would achieve in the trial must realise the risks of their conduct. Manukau was prepared to pay Shoye $50,000 to avoid a trial where each party sought to enforce an illegal contract against the other. This requires recognition. I am satisfied, therefore, that Manukau should be entitled to an award of costs.

[33] Here, Manukau seeks an uplift of 50 per cent over scale costs. At category 2B, the scale costs and disbursements come to $37,149.25. The uplift Manukau seeks would bring the costs and disbursements to $50,218.25.

[34] Manukau argues that there can be no reasonable justification for Shoye rejecting its settlement offer. Further, by rejecting the offer, Manukau submits that Shoye forced Manukau into incurring unnecessary costs. Whilst these arguments have some strength, the simple fact is that Manukau elected to run a case before this Court, which was based on the contractual arrangements being legal. It sought to disavow the conduct of its agent. Had Manukau presented a case which acknowledged the illegality of the transaction and focused on defending the counterclaim made against it, I would have considered it entitled to an award of increased costs. Instead, it sought to present what were patently illegal arrangements as legal. I consider this conduct, coupled with the seriousness of the illegality, to be a disentitling factor to an award of more than scale costs. It follows that Manukau is entitled to scale costs of $26,138. I consider that its disbursements of $11,011.25 are reasonable.

High Court of New Zealand Decisions

Shoye Venture Limited v Wilson [2014] NZHC 1636 (11 July 2014)