Hanlon v Domain Orthopaedic Services Limited [2014] NZHC 1794 (31 July 2014)

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UNDER	Section 241(4)(d) of the Companies Act 1993
BETWEEN	MICHAEL MURRAY HANLON, CLAYTON JOHN HUDSON BROWN and STUART ALLISTER McCOWAN Plaintiffs
AND	DOMAIN ORTHOPAEDIC SERVICES LIMITED First Defendant MICHAEL JOHN BARNES Second Defendant _{Continued over}

Hearing:	28 April 2014
Counsel:	S B W Grieve QC and D J Clark for the Plaintiffs in Proceeding CIV-2012-404-007451, and for the Defendants in Proceeding CIV-2013-404-000819 M P Reed QC and P A Morten for the Defendants in Proceeding CIV-2012-404-007451, and for the Plaintiff in Proceeding CIV- 2013-404-000819
_Judgment:	_{31 July 2014}

This judgment was delivered by Justice Duffy on 31 July 2014 at 4.30 pm, pursuant to

HANLON and ORS v DOMAIN ORTHOPAEDIC SERVICES LTD [2014] NZHC 1794 [31 July 2014]

AND MICHAEL MURRAY HANLON, CLAYTON JOHN HUDSON BROWN and STUART ALLISTER McCOWAN Defendants

[1] These proceedings involve a company, Domain Orthopaedic Services Limited (“Domain”); it held the lease for premises that were occupied by four orthopaedic surgeons, as well as serving as the vehicle for business activities ancillary to their surgical practices. Each surgeon held 25 per cent of the shares in Domain, and each was a company director of Domain.

[2] The surgeons fell out with one of their number; each faction brought contested legal proceedings against the other. As each faction became a plaintiff in one proceeding and a defendant in the other, I propose for ease of reference to refer to them by surname.

[3] The first proceeding was commenced on 11 December 2012 by Messrs Hanlon, Brown and McCowan (“Hanlon and others”). In this proceeding, Hanlon and others sought an order under s 241 of the Companies Act 1993 that it was just and equitable that Domain be put into liquidation (CIV-2012-404-007451). Mr Barnes was named as the second defendant.

[4] The second proceeding was commenced on 15 February 2013 by Mr Barnes against Hanlon and others. In this proceeding, Mr Barnes sought an order under s 174 of the Companies Act that the affairs of Domain had been, were being and were likely to be conducted in a manner that is oppressive, unfairly discriminatory, or unfairly prejudicial to Mr Barnes in his capacity as a shareholder of Domain (CIV-

[5] The proceedings are now resolved. The only outstanding dispute is about payment of costs. Hanlon and others seek awards of above scale costs against Mr Barnes; he opposes any award being made. The issue for me to determine is whether Hanlon and others should be awarded costs or not.

[6] I do not propose to go through the history of either proceeding. Matters reached a head after Allan J delivered a decision on 25 November 2013 granting an application by Hanlon and others for Mr Barnes to provide particular discovery and to answer interrogatories. On 16 December 2013, Mr Barnes filed a notice of discontinuance of his proceeding against Hanlon and others (CIV-2013-404-000819).

The notice stated that the discontinuance was without prejudice to Mr Barnes’ right

to argue he was not obliged to pay costs. On the same day in proceeding CIV-2012-

404-007451, Mr Barnes filed a notice of discontinuance of his defence and registered his consent to Domain being wound up. This notice was also stated to be without prejudice to his right to argue that he was not obliged to pay costs. So as at

16 December 2013, Mr Barnes had abandoned his proceeding against Hanlon and others and he had abandoned his opposition to their proceeding against him. The only remaining outstanding dispute between them was about payment of costs.

[7] As Allan J has now retired, the costs argument came before me for hearing and determination. The arguments fall under two heads: costs arising from Allan J’s decision on particular discovery and interrogatories; and costs arising from Mr Barnes’ decision to abandon his proceeding and his defence of the other proceeding. I shall deal with each in turn.

[8] 6 November 2013 was the allocated hearing date for a number of interlocutory applications that were to be heard by Allan J. Mr Barnes had applied for particular discovery, for the imposition of sanctions against Hanlon and others for their alleged contempt and for directions as to confidentiality (“the Barnes’ applications”): see Barnes v Hanlon [2013] NZHC 3097 at [5]. Hanlon and others had applied for particular discovery and for orders for answers to interrogatories (“the Hanlon and others’ applications”): see [6].

[9] Regarding the Barnes’ applications, at [5] of his decision, Allan J records that “[j]ust prior to the hearing of 6 November, the Court was informed that these applications were not to proceed”. The applications were formally withdrawn on the day of the hearing. Hanlon and others were ready to oppose these applications and they sought indemnity costs in light of the late withdrawal. Because Mr Barnes’ counsel was not ready to deal with an indemnity costs application, Allan J postponed this question of costs.

[10] The Hanlon and others’ applications were successful: see [79]. Allan J found that Hanlon and others were entitled to costs: see [80]. The quantification of those costs was to be determined at the same time as the application for indemnity costs.

[11] The starting point in principle is that: (a) in light of Allan J’s finding on costs for Hanlon and others’ applications, all that is now required is their quantification; and (b) for the discontinued Barnes’ applications and proceeding (CIV-2013-404-

000819), there is a presumption that costs are payable by a discontinuing plaintiff to a defendant: see r 15.23 of the High Court Rules.

Indemnity costs following discontinuance of the Barnes’ interlocutory applications

[12] Hanlon and others seek indemnity costs, or increased costs for their opposition to interlocutory applications that Mr Barnes discontinued shortly before the hearing date.

[13] The general rule is that costs follow the event and that following the discontinuance of an application, unless the question of costs is agreed, the discontinuance is treated as an unsuccessful outcome for the applicant.

[15] One of the problems with the arguments on costs by both parties is that there is no evidence to support their arguments. Each has made contested factual assertions in their submissions on costs. In Harley v McDonald [2002] 1 NZLR 1, the Privy Council was critical of Giles J for taking “into account certain matters of fact which were not properly before him”: see [38], [65]. Those matters included the views Giles J formed on the conduct of the case before the trial before him had begun, which were matters that he had no personal knowledge of and no evidence to inform him. Harley was about an award of indemnity costs against a barrister. However, I consider that the above criticism of the Judge’s approach is applicable to any consideration of indemnity costs. Such awards are exceptional. Apart from the circumstances listed under r 14.6(4)(c) to (e), none of which are applicable here,

indemnity costs awards hinge on findings that the paying party has acted badly or very unreasonably: see Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009]

3 NZLR 400 at [27]. Unless there is a sound evidential basis to justify an award of indemnity costs, it is difficult to see how findings of bad or unreasonable conduct can be made in a procedurally fair manner. In Harley at [53], the Privy Council opined that a court “must take great care to confine its attention to the facts which are clearly before it or to facts relating to the conduct of the case that are immediately and easily verifiable”. Where facts are contested and, therefore, not so easily verifiable, it may be necessary for evidence to be tested by cross-examination. Whilst hearings involving oral evidence are unusual for costs awards, procedural fairness when it comes to some findings of indemnity costs necessitates a full hearing. The heavy burden that an award of indemnity costs can impose on a party means that the Court must be properly satisfied that the circumstances of the particular case call for such an award.

[16] Hanlon and others contend that the Barnes’ applications were brought for purposes that qualify for an award of indemnity costs. However, the absence of evidence in this case makes it difficult for Hanlon and others to maintain this argument.

[17] On the face of it, an application for orders holding Hanlon and others in contempt (relating to use of discovered documents) and accusing them of mishandling confidential information are serious allegations that can be damaging to reputation, particularly for medical professionals. Such allegations are not to be made lightly. Whilst not on an equal footing with allegations of fraud, they are a close second.

[18] If false allegations of contempt and mishandling confidential information are made, those adversely affected have few opportunities to hold the maker of the allegations to account. The makers of such allegations enjoy the protection of absolute privilege. Indemnity costs and, where professionals are concerned, disciplinary proceedings for abuse of the privilege are about the only available remedies.

[19] In the present case, the Barnes’ applications did not proceed. So, whilst the accusations that Hanlon and others complain about were in the papers filed in Court, they were not aired in the courtroom. Their damage was, therefore, limited.

[20] I consider that Mr Barnes has to be given some recognition for withdrawing his interlocutory applications. Had they proceeded to a hearing and failed for being false, they might well have warranted an indemnity costs order. But in light of their discontinuance and the lack of an evidential foundation to support an award of indemnity costs, I am not prepared to go that far.

[21] I do, however, consider that the discontinuance of the Barnes’ applications only two days before the hearing is conduct that warrants more than an award of scale costs. Hanlon and others took the Barnes’ applications seriously enough to engage senior counsel. They were entitled to do so. When parties find themselves facing serious allegations from an opposing party, they are entitled to take all necessary steps to protect themselves from such allegations. The expense and effort that this may involve is wasted when such allegations are withdrawn at the last moment, which I consider to have been the case here. In such circumstances, it is only right that their wasted costs are compensated by an award of costs that goes beyond the scale.

[22] Here the scale costs were category 2. The work involved in opposing the Barnes’ applications was the preparation of two notices of opposition, written submissions and a bundle of documents. Given the nature of the allegations made in the Barnes’ applications, I consider that for the effort involved in preparing to oppose those applications, time band C would be appropriate. Category 2C costs come to

$19,900. Ordinarily, an award of increased costs is not more than 50 per cent of scale costs. The unreasonably late notice of the discontinuance warrants some recognition. I think that an uplift of 30 per cent would be appropriate. This brings the costs award to $25,870.

[23] Hanlon and others were successful in obtaining orders for particular discovery and requiring answers to interrogatories. The applications for those orders were opposed by Mr Barnes. Scale costs at category 2B come to $16,517; at category 2C, the costs come to $31,243. Hanlon and others seek an award of increased costs at $38,402.89, which is two-thirds of their actual costs. Alternatively, they seek an award of costs at category 2C.

[24] The hearing of these applications took one day. Hanlon and others succeeded in just about all respects. Where they did not was in relation to the request for particular discovery regarding material relating to what is known to orthopaedic surgeons who deal with ACC as the “six week rule”: see [48] of Allan J’s judgment. At [54] of his judgment, Allan J noted that the scope of particular discovery relating to this category of material was to be confined to communications in respect of the ACC audit of compliance with the six week rule.

[25] Hanlon and others were left with little option to seek an order for answers to interrogatories. They issued a notice to answer interrogatories and the answers they received were woefully inadequate. The objections that Mr Barnes noted in his reply to the notice to answer interrogatories were later dismissed by Allan J when they were subsequently raised as grounds for opposing an order to answer interrogatories.

[26] From my reading of the judgment of Allan J and the material that was before the Judge, I am satisfied that the work involved in successfully pursuing the Hanlon and others’ applications involved more time than is recognised by time band B. Accordingly, I consider that costs at category 2C are appropriate for those applications, save for one exception, which I deal with below. However, I see no reason why allowance should be made for second counsel. Whilst the work in pursuing those applications warranted more than 2B costs, I consider that it was nonetheless work within the scope of one counsel.

[27] Hanlon and others seek costs at category 2C for the preparation of four bundles of documents. Those bundles were relevant to their interlocutory applications and their opposition to the Barnes’ interlocutory applications. I see no reason why the preparation of a bundle of documents for an interlocutory hearing should be categorised as warranting 2C costs. Nor do I see how the preparation claimed can extend to four bundles. I consider that they should receive no more than category 2B costs for the preparation of one bundle. This comes to $1,194. Additional copies of a bundle of documents should be dealt with as disbursements.

[28] I am not satisfied that an award of increased costs above scale 2C is warranted. Apart from a minor restriction on one of the categories of material in the application for particular discovery, Hanlon and others achieved all that they had sought. Their success on the order for answers to interrogatories was reasonably predictable as was their success on the order for particular discovery. Moreover, there is nothing that strikes me as unreasonable about Mr Barnes’ opposition to those applications. Awards of increased costs are the exception rather than the norm. They should not follow simply because a party is successful in circumstances where that success could reasonably be predicted. Something more, such as the conduct regarding the Barnes’ applications, is required before an award of increased costs will be made. In this regard, I accept Mr Barnes’ submission that the scale costs regime is to be applied in the absence of some good reason to the contrary: see Mansfield Drycleaners Ltd v Quinny’s Drycleaning (Dentice Drycleaning Upper Hutt) Ltd [2002] NZCA 277; (2002) 16 PRNZ 662 (CA) at [28] and [29].

[29] The costs 2C schedule prepared by Hanlon and others ($31,243) requires a deduction of $995 for second counsel. It also requires a deduction of $7,960 for the claim for four bundles at 2C costs. Then it requires the addition of $1,194, being costs of preparation of one bundle at category 2B. It follows that Hanlon and others are entitled to costs on their applications in the sum of $23,482.

[30] Hanlon and others also seek disbursements of $1,150 for filing fees and sealing fees. These relate to their two applications and their one notice of opposition. I am satisfied that they are entitled to recover those amounts as disbursements.

[31] Mr Barnes discontinued his defence to this proceeding. Hanlon and others seek costs at category 2B for the steps that they took before Mr Barnes abandoned his defence to this claim. In principle, they are entitled to those costs. I see no reason to depart from general principle. It follows that they are awarded costs of

[32] They seek disbursements of $7,102.40. Of this amount, $5,290 represents a fee for forensic costs. Money was spent determining whether Mr Barnes had accessed other computers on Domain’s premises. Those services revealed that he had. I consider that the use of the forensic services was reasonable and relevant to this proceeding. Moreover, Mr Barnes does not oppose the disbursements claim of

$7,102.40. I am satisfied that disbursements of $7,102.40 are payable by Mr Barnes.

[33] For the defence of proceeding CIV-2013-404-00819, Hanlon and others seek scale costs at category 2B for all steps, bar one. For the preparation of a second affidavit of documents, they seek costs at category 2C.

[34] Mr Barnes has discontinued this proceeding. The general rule is that he is liable for costs: see r 15.23.

[35] There is an exception where it is just and equitable not to award costs. Mr Barnes has made various arguments that his circumstances come within the just and equitable exception. Some of his arguments refer to documents that are in evidence as exhibits to affidavits filed for other purposes. Other arguments simply set out their factual basis in his submissions. I find none of his arguments persuasive.

[36] Further, a departure from r 15.23 will be the exception. Without agreement on the facts, a party seeking to establish this exception will have to provide an

evidential basis for it. Mr Barnes has not done so. This is another reason why I

[37] I see no reason, therefore, why Hanlon and others should not receive costs for the steps they took to defend themselves in this proceeding. Ordinarily, costs at category 2B would be sufficient.

[38] Mr Barnes objects to the inclusion of a claim for the preparation of a statement of defence in the itemised costs sought by Hanlon and others. He describes this proceeding as an originating proceeding, which is a proceeding not commenced by statement of claim. Thus, no statement of defence would be required. However, a proceeding brought under s 174 of the Companies Act is not brought as an originating application under part 19, as Mr Barnes appears to assume. Instead, such applications are brought under part 18: see r 18(1)(b)(iii) of the High Court Rules. Rule 18.4 requires proceedings brought under part 18 to be commenced by statements of claim. Accordingly, a statement of defence will also be required. Hanlon and others are entitled, therefore, to claim for their preparation of a statement of defence.

[39] The second affidavit of documents of Hanlon and others lists emails. The emails are numbered from 272 – 659 consecutively. I infer from this that the task of preparing the affidavit required someone to locate 387 emails. Hanlon and others have provided an explanation for why they argue that costs at category 2C should be applied for this affidavit. The explanation is not in evidential form, though it entails a factual narrative.

[40] Unless statements of facts are agreed, I am not prepared to rely on submissions that give a factual account. Therefore, I am not prepared to increase costs to 2C for the second affidavit of documents.

[41] Mr Barnes has identified an error in the calculation of the costs for the preparation of four memoranda by Hanlon and others. The costs allowance at category 2B should come to $3,184, not the $3,980 relied on by Hanlon and others. Accordingly, the total costs claim here needs to be adjusted.

[42] Mr Barnes has also objected to a claim for preparing affidavits at a cost of

$4,975 on the ground those costs come under step 49, as this proceeding was for the liquidation of a company. I reject this argument. I do not read steps 48 and 49 which are listed under the heading “company liquidation proceedings” in schedule 3 as exhaustively providing for costs in company liquidations. This explains why no provision is listed under this heading for filing notices of opposition or preparing submissions either for or against the making of a winding up order.

[43] I have looked at the two affidavits that Mr McCowan swore for this proceeding. I consider that the work involved in preparing those affidavits requires recognition in the form of costs, and that the amount of $4,975 is appropriate. For the avoidance of doubt on this topic, I note that in the alternative, I exercise the inherent discretion available to me to award costs to include this sum in the award made to Hanlon and others.

[44] When costs at category 2B are applied to all the steps in the costs claim of

[45] Mr Barnes says that he made a number of offers of settlement up to the time of the interlocutory hearing of 6 November 2013. He argues that the rejection of those offers by Hanlon and others is a factor that counters their entitlement to costs. I reject that argument. Mr Barnes attempts to draw an analogy with Calderbank offers. However, those apply when party A has offered to settle at more than what party B would obtain by way of judgment. Here Hanlon and others were successful with their interlocutory applications. They should be treated as having successfully opposed everything that Mr Barnes sought, as the outcome was that he discontinued his claims and applications against them. Thus, for Hanlon and others, they did better than they would have done had they accepted Mr Barnes’ offers of settlement. Whilst there are sound public policy reasons for encouraging settlements, parties are entitled to have their disputes resolved by adjudication if they so wish. Unless the outcome is worse than it would have been if they had settled, there is no good reason for denying them the costs they would ordinarily be entitled to recover.

[46] I have carefully considered all the arguments made by each of the parties. Both parties to varying degrees have raised issues that go to the merits of the substantive proceedings. As those merits were not tested, I find such arguments unhelpful. Whilst there are special cases following a discontinuance where some focus on the merits will nonetheless occur in general this is not done. There is good reason for not doing so. Without a solid evidential basis and proper adherence to procedure fairness, resolution of disputed factual issues is not possible. I am satisfied that the decisions on costs that I have reached result in appropriate and properly reached outcomes.

[47] Hanlon and others are entitled to the following costs in the following sums:

(b) Costs of $23,482 on the interlocutory applications on which they were successful, [29] herein; and disbursements of $1,150 [30] herein;

(d) Costs of $29,651 on proceeding CIV-2013-404-000819 [44] herein. [48] As there have been arithmetical adjustments to the itemised costs schedules

prepared by Hanlon and others, the parties are given leave to file further memoranda regarding the arithmetical recalculation of the itemised costs, should there be a need to do so.

High Court of New Zealand Decisions

Hanlon v Domain Orthopaedic Services Limited [2014] NZHC 1794 (31 July 2014)

High Court of New Zealand

Hanlon v Domain Orthopaedic Services Limited [2014] NZHC 1794 (31 July 2014)