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Body Corporate S73368 v Otway [2018] NZHC 1095 (17 May 2018)

Last Updated: 30 May 2018


IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
I TE KŌTI MATUA O AOTEAROA TAURANGA MOANA ROHE
CIV-2015-470-000146
[2018] NZHC 1095
BETWEEN
BODY CORPORATE S73368
Plaintiff
AND
ROSALIND KAY OTWAY (NOW ROSALIND KAY WRIGHT) AND OLPHERT SANDFORD TRUSTEE SERVICE COMPANY LIMITED
First Defendant
PHILLIP HERBERT DORR, SHARON LESLEY DORR AND DONALD RAYMOND PILBROW
Second Defendant
Hearing:
On the papers
Counsel:
S Price, I Stephenson and J Scoberg-Evans for Plaintiff G Brittain QC and J Delaney for Defendants
Judgment:
17 May 2018


JUDGMENT OF WOOLFORD J



This judgment was delivered by me on Thursday, 17 May 2018 at 4:45 pm pursuant to r 11.5 of the High Court Rules.


Registrar/Deputy Registrar





Counsel: G Brittain QC, Tauranga

Solicitors: Minter, Ellison, Rudd & Watts, Solicitors, Auckland




BODY CORPORATE S73368 v OTWAY [2018] NZHC 1095 [17 May 2018]

Introduction


[1] A tower block in Mt Maunganui suffered damage because of water ingress. The body corporate sought to recover repair costs from two first-floor apartment owners. In my judgment of 20 December 2017, I ordered each defendant to pay
$44,344.75 to the body corporate as their share of expenses incurred in the joinery work undertaken in their apartments.1 The body corporate had sought a significantly larger award.

[2] I also granted the declaration the body corporate sought, namely, that the location of the legal boundaries between unit floors at the property was the top of the concrete floor slab of that unit.

[3] Each party now seeks costs.

The claims for costs


[4] The body corporate seeks costs on the basis it succeeded against the defendants. It acknowledges, however, its success was partial and makes a 50 per cent reduction to its costs claim to reflect that. It seeks:

(a) Costs of $31,220.00. This comprises scale costs of $62,440.00 on a 2B basis with a 50 per cent reduction.

(b) Expert disbursements of $47,914.39. This comprises $110,488.32 less expert disbursements that relate to causes of action that did not succeed and a 33 per cent reduction to all other disbursements, to reflect partial success.

(c) Procedural disbursements of $17,350.00.

[5] The defendants acknowledge the body corporate achieved some success. They say, however, they are entitled to costs, primarily because the body corporate failed to


1 Body Corporate S73368 v Otway [2017] NZHC 3265.

accept settlement offers without reasonable justification. The defendants seek costs and disbursements as follows:

(a) Costs of $83,638,38. This comprises scale costs of $62,886.00 on a 2B basis increased by 33 per cent because of the body corporate’s failure to accept settlement offers.

(b) $220.00 for filing fees.

[6] This judgment addresses three key issues. First, I address the effect of the body corporate’s partial success (or failure) on its costs claim. Second, I determine the effect, if any, of the settlement offers. Third, I turn to disbursements.

Effect of partial success on costs claim


[7] Rule 14.1 of the High Court Rules 2016 provides costs matters are at the discretion of the court. Rule 14.2(1) sets out general principles that apply to the determination of costs. Generally, unless there are exceptional circumstances, the successful party is entitled to costs. This principle is reflected in r 14.2(1)(a). As the Supreme Court has said, “the loser, and only the loser, pays”.2

[8] If a party fails on some of its claims, and therefore only achieves partial success, the court can recognise that through reducing costs otherwise payable or ordering costs to lie where they fall.3 It will be necessary to make a realistic appraisal of the end result. A broad-brush approach will often be required in reducing the amount of costs that would have been appropriate had full success been achieved.

[9] While the body corporate did receive the declaration it sought, the final awards fell well short of its desired result. As noted above, I ordered each defendant to pay
$44,344.75 in relation to the cost of the joinery of their apartments. This can be contrasted with the amounts sought, some overlapping, by the body corporate:


2 Shirley v Wairarapa District Health Board [2006] NZSC 63, [2006] 3 NZLR 523 at [19].

  1. Water Guard NZ Ltd v Midgen Enterprises Ltd [2017] NZCA 36 at [13] and Weaver v Auckland Council [2017] NZCA 330 at [26]. See also r 14.7(d) of the High Court Rules 2016.

(b) An award of $581,660.86 against both defendants pursuant to s 127 of the Unit Titles Act.

(c) An award of $290,930.43 against each defendant pursuant to s 138 of the Unit Titles Act.

[10] The body corporate says a reduction of 50 per cent is appropriate in light of its partial success. I agree. While it fell well short of its desired result, it still had some success. Were it not for the factors discussed below, I would have awarded 2B scale costs to the body corporate with 50 per cent reduction.

Settlement offers

Principles


[11] Rule 14.10(1) of the High Court Rules provides that a party to a proceeding may make a written offer to another party at any time that is expressly stated to be without prejudice except as to costs and relates to an issue in the proceedings. Such an offer is termed a Calderbank offer, and must not be communicated to the court until the question of costs is to be decided.

[12] The rules that govern Calderbank offers seek to encourage settlement, where appropriate. As the Court of Appeal said in Moore v McNabb, it is a requirement of fairness that litigants, particularly defendants, have some economic means of limiting their exposure to the risk of costs.4 After all, a defendant faced with litigation can hardly be expected to do more than to make a reasonable settlement offer after making a realistic appraisal of its case. It would not be fair for such a defendant to then bear the costs of the litigation, when the plaintiff failed to better the settlement sum.

[13] The rules that give recognition to settlement offers have a public benefit as well. If the parties resort to the courts, there is public expenditure involved. It is

4 Moore v McNabb (2005) 18 PRNZ 127 (CA) at [56]–[58].

therefore in the public interest to have measures in place that encourage reasonable settlement of litigation.

[14] Rule 14.11 sets out the effect of Calderbank offers on costs. Fundamentally, as r 14.11(1) states, 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. Subclauses (3) and (4) of r 14.11, which set out the effect of such offers, are expressly made subject to this overriding discretion.

[15] Rule 14.11(3) provides Party A is entitled to costs on the steps taken in the proceeding after the offer is made, if party A:

(a) offers a sum of money to party B that exceeds the amount of a judgment obtained by party B against party A; or

(b) makes an offer that would have been more beneficial to party B than the judgment obtained by party B against party A.

[16] Further, r 14.11(4) provides the offer may be taken into account, if Party A makes an offer that:

(a) does not fall within paragraph (a) or (b) of subclause (3); and

(b) is close to the value or benefit of the judgment obtained by party B.

[17] Settlement offers can also be taken into account pursuant to r 14.7 of the High Court Rules:

14.7 Refusal of, or reduction in, costs

Despite rules 14.2 to 14.5, the court may refuse to make an order for costs or may reduce the costs otherwise payable under those rules if—

...

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

...

(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

...


[18] The relevance of settlement offers to the consideration of increased costs is discussed below at [42][45].

Offers in this case


[19] Multiple offers were made by the parties in this case. I turn to these now.

[20] On 18 December 2015, the defendants made an offer to each pay $100,000.00 to settle the claim:

Oceanside - Tower Two - without prejudice save as to costs

2018_109500.jpg
  1. My clients offer to settle this matter on the following terms:

(a) The body corporate shall enforce its contract and warranties with Watts & Hughes and other contractors, with due diligence, to ensure that the following matters are repaired to the reasonable satisfaction of my clients’ independent building consultant, Rex Moyle:
  1. The scratches and damage to the balustrade panels.
  1. The mismatched colouring of the membrane, as a result of the repair of the membrane immediately adjacent to the sliding doors of each apartment.

(b) There will be a payment by my clients of $100,000 (including GST if any) in respect of each apartment (apartments 1A and 1B). That payment is in addition to the levies that have already been paid.

(c) $80,000 will be paid within twenty one days of acceptance of these terms, with the balance of $20,000 paid once the issues with the balustrade panels and the mismatched colour of the membrane are resolved, to the reasonable satisfaction of my clients’ independent building consultant, Rex Moyle.

(d) Acceptance of these terms shall operate as a full and final settlement of:
  1. All claims of any nature by the body corporate against my clients in any way relating to the repair work carried out by Watts & Hughes or associated

contractors (including the works described by your client as the “soffit works”).

  1. All claims of any nature by the body corporate against my clients in any way relating to any of the underlying structural problems and building defects that caused the need for the repair work (including any further remedial work that might be required as a result of any shortcomings in the repair work carried out to date).
  1. All claims in the existing litigation.

(e) The body corporate indemnifies the owners of apartments 1A and 1B against any losses or costs of any nature incurred as a result of any other member of the body corporate making any challenge of any nature, including but not limited to litigation of any type, to the apportionment of the cost of repairs to the owners of apartments of 1A and B pursuant to this agreement.

(f) All costs to lie where they fall.

(g) The terms of settlement may be disclosed to all other unit owners, but otherwise shall be confidential to the parties and their legal and accounting advisers.

(h) My clients will co-operate in the preparation of a joint statement to be provided to the owners of the other units, to confirm that settlement has been reached.
  1. This offer remains open for acceptance until 1 February 2016.

[21] The defendants say the body corporate declined this offer, which exceeded the eventual judgment sum. The defendants also highlight the fact that it was in addition to any levies they had already paid.

[22] While the body corporate acknowledges the amount offered exceeds the judgment sum, it says the offer attempted to impose obligations on it in relation to future repairs to the defendants’ membrane, which was not part of the claim. It further says the offer required a future allocation of costs contrary to the Unit Titles Act and required the agreement of shop and tower owners which the body corporate was not able to provide.

[23] The body corporate rejected this offer on 21 December 2015. It countered with an offer that it would be willing to settle if the defendants accepted liability of
$170,000.00 each. The offer was said to expire the following day, 22 December 2015
at 5.00 pm. The offer was either declined or not responded to by the defendants before the deadline.

[24] On 12 June 2017, counsel for the defendants wrote to counsel for the body corporate. He referred to the earlier offers and noted “that when settlement negotiations ended, the parties were only $140,000 apart”. He also noted that they “owe it to their clients to at least revisit settlement”.

[25] Counsel for the body corporate responded on 10 July 2017. I note the body corporate had new counsel by this point. The letter stated the body corporate “will accept $650,000 in full and final settlement of its claim against the defendants”. The letter provides:
  1. Introduction

1.1 We refer to your letter of June 2017. We set out our response below, addressing the claim as it stands, indicating the matters to be addressed in evidence, notifying an intention to amend the claim, cost exposure and settlement.

1.2 In light of what is set out below, the Body Corporate will accept

$650,000 in full and final settlement of its claim against the defendants.

...


6.2 In your recent letter you reference an offer to settle by your client of

$200,000 and by the Body Corporate of $340,000. Time and cost have moved on since then. There has been an increase in costs incurred by the Body Corporate and its owners as a result of your clients’ conduct, and interest has continued to accrue. Meanwhile, the Body Corporate has briefed witnesses.


6.3 In order to reach a settlement in this matter and to avoid the parties incurring additional expense, we are instructed the Body Corporate will accept $650,000 in full and final settlement of its claim against the defendants.

6.4 Should the offer be rejected and the matter proceed to trial the amount of the amended claim with costs and interest will be roughly

$1,121,877.10 comprising:


(a) $619,650.40 building work including the set-off of levies already paid;

(b) $395,401.87 MERW and McCaw Lewis costs and disbursements, assuming further (conservative) costs of

$120,000 to judgment;

(c) $106,824.90 interest accrued as at 20 November 2017 (not including interest on the additional quantum in the amended claim or interest until judgment).

6.5 The figure of $1,121,877.10 is of course in addition to any of your clients’ own legal costs.

6.6 The offer will remain open for acceptance until 4.00pm, Friday 14 July 2017.

[26] Counsel for the body corporate asked for an update on 4 August 2017 by email. Counsel for the defendants then emailed the body corporate’s counsel on 7 August 2017 with a counteroffer:

Hi. My clients are prepared to each pay $200,000 including GST in full and final settlement of all issues. They will not be bound until a written settlement agreement is signed.


[27] Counsel for body corporate responded with another counteroffer in a letter dated 9 August 2017:
  1. We refer to your clients’ offer dated 7 August 2017 of $400,000 in full and final settlement.
  1. Your clients' offer roughly matches the cost of the repairs as presently claimed. However, considerable interest and costs have accrued over the years. Regrettably, those costs place your clients’ offer well below the Body Corporate’s bottom line.
  1. We are instructed the lowest figure that the Body Corporate will accept to avoid any further action being taken is $531,000 including GST in full and final settlement of the claim for recovery of repair costs, and on the basis that your clients will not oppose the orders sought in relation to unit boundaries.

...


[28] Counsel for the defendants advises on 16 August 2017 the defendants confirmed they would settle on the basis of a payment of $450,000, together with their consent to the unit boundaries being fixed at the top of the concrete slab, provided that future apportionment of costs in respect of repairs to the new membrane were allocated as follows:

(a) 33 per cent to the “Tower”.

(b) 33 per cent to the level one deck owners.
(c) 33 per cent to the shop owners.

[29] The body corporate essentially repeated its previous offer on 21 August 2017:
  1. We refer to your email correspondence dated 16 August 2017, declining our clients’ settlement offer of 9 August 2017.
  1. Your correspondence has failed to identify any legal or principled basis for the claim of a one-third apportionment of the past repair costs, or how the Body Corporate can lawfully apportion future building work recovery in the way you propose.
  1. Our instructions are to accept for and on behalf of the Body Corporate no less than $531,000 including GST, on the terms set out in our letter of 9 August 2017. That offer is open until 4.00pm today, 21 August 2017.
  1. In response to your questions about the new membrane, the Body Corporate’s advice is that while there is crazing this does not affect the performance of the product. Nevertheless, a warranty is in place and the Body Corporate will progress works required, if any, under the warranty.
  1. Finally, we will be serving an amended statement of claim before close of pleadings today. Please confirm whether you are happy to receive the amended claim by email.

The effect of the offers


[30] I consider the defendants are entitled to scale costs on a 2B basis for steps taken in the proceeding after 7 August 2017 for four interrelated reasons.

[31] First, I do not consider the 18 December 2015 offer falls under r 14.11(3) or (4). While the amount offered exceeds the ultimate judgment sum, the defendants’ offer included several conditions. Most significantly, the defendants said acceptance of the offer would be in full and final settlement of a number of matters in addition to the present litigation. The defendants also wanted an indemnity from the body corporate.

[32] Asher J said in Rapana v McBride Street Cars Ltd that a party wishing to have the benefit of a Calderbank offer should make a monetary offer without significant conditional terms.5 I endorse that approach. In light of the conditions in the

5 Rapana v McBride Street Cars Ltd [2007] DCR 551 (HC) at [22].

18 December 2015 offer, in my view, I cannot fairly determine whether this offer was more beneficial to the body corporate than the eventual judgment.

[33] Second, I consider the email on 7 August 2017 from the defendants’ counsel, contained above at [26], constituted a Calderbank offer.

[34] The email was specific as to amount and being in “full and final settlement”. It provided the defendants were “prepared to each pay $200,000 including GST in full and final settlement of all issues”.

[35] Aside from this, it was brief. Given it was sent as a response to a detailed offer made by the body corporate, in my view, it was implicit that it would be on the same terms and conditions as the body corporate’s previous offer, except for a different amount. The subject line of the email also still said “without prejudice save as to costs” – it formed part of a series of such communications.

[36] The next offer from the body corporate referred to the defendants’ “offer dated 7 August 2017 in full and final settlement”. While this is not determinative, the body corporate perceived it as an offer to settle.

[37] My conclusion on this point is also consistent with the principles underlying the Calderbank costs rules, outlined above at [12][13]. In substance, the 7 August 2017 email was a genuine attempt to settle the case. After likely appraising their case, the defendants communicated to the plaintiffs the amount they are willing to settle for. This is the type of action the Calderbank rules are meant to cover.

[38] I acknowledge that the email said the defendants “will not be bound until a written settlement agreement is signed”. However, in my view and in these circumstances, this is akin to making an offer conditional on the agreement being finalised in writing. I do not consider this phrase indicated an intention on the part of the defendants to negotiate further terms. It is not a significant condition, such as those referred to above at [31]. Practically, it will almost always be the case that parties subsequently enter into a formal written settlement agreement.
[39] Edwards J recently adopted a similar approach in Bushline Trustees Ltd v ANZ Bank New Zealand Ltd.6 In that case, Bushline argued the offers made by ANZ were not capable of acceptance because they were subject to the parties signing a written settlement agreement, even though terms of a written settlement were not specified in the letters of offer. Edwards J still treated ANZ’s letters as offers, and noted that they were not declined because of the requirement of a written agreement – they were likely declined because of the amount offered.

[40] Third, I consider the 7 August 2017 offer falls within r 14.11(3). The defendants together offered to pay $400,000.00. This sum exceeds the eventual judgment sum, even if the body corporate’s costs and interest are added to it. I am also satisfied the offer was more beneficial to the body corporate than the judgment it ultimately obtained. In reaching this conclusion, I have taken into account the body corporate’s submission as to its non-monetary success.

[41] Fourth, as the offer falls within r 14.11(3), I consider the defendants are entitled to 2B scale costs on steps taken in the proceeding after the offer was made, that is after 7 August 2017. Unfortunately, however, neither party has itemised their costs by date. I am, therefore, unable to determine the appropriate award at this time.

Increased costs?


[42] The defendants seek an increase of 33 per cent for costs for all steps taken in the proceeding. They say the body corporate acted unreasonably in rejecting their settlement offers.

[43] As regards the relevant principles, I agree with the approach of Clifford J in Oceania Furniture Ltd v Debonaire Products Ltd.7 The Judge said that a successful Calderbank offer does not in and of itself give rise to an entitlement to indemnity or increased costs.8 The rules relating to Calderbank offers discussed above at [11][16] are independent to those relating to increased costs. Clifford J further said:9

6 Bushline Trustees Ltd v ANZ Bank New Zealand Ltd [2018] NZHC 454.

  1. Oceania Furniture Ltd v Debonaire Products Ltd HC Wellington CIV-2008-485-1701, 16 September 2010.

8 At [41].

9 At [41].

Any such entitlement depends upon the separate provisions in r 14.6. In my judgment, that conclusion is confirmed by the provision of r 14.11(2)(b), which provides that the entitlement under r 14.11(3) “do not limit rule 14.6 or rule 14.7”. I think that makes clear that the costs a party may be entitled to under r 14.11(3) are scale costs, but that such a party may also apply for indemnity [or increased] costs in appropriate circumstances.


[44] The relevant parts of r 14.6 provide:

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).

(2) The court may make the order at any stage of a proceeding and in relation to any step in it.

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

...

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

...

(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

...


[45] Increased costs are awarded where a party has failed to act reasonably.10 An example of unreasonable behaviour is where a party fails to accept an offer for settlement without reasonable justification. The question in this case, therefore, is now whether the body corporate acted unreasonably in rejecting the 7 August 2017 offer?

[46] In my view, the body corporate’s conduct in this case does not warrant an increased costs order. I have reached this conclusion for three reasons. Some overlap.


10 Bradbury v Westpac Banking Corp [2009] NZCA 234; [2009] 3 NZLR 400 (CA) at [27].

[47] First, and most significantly, the body corporate engaged with the offer on a meaningful basis and counteroffered again, this time offering to accept $531,000.00. This is significantly less than its previous offer of $650,000.00 – it genuinely attempted to meet the defendants in the middle. I am also satisfied the body corporate made serious attempts to engage with settlement offers generally.

[48] Second, the defendants’ offer was brief. It did not contain a detailed appraisal of the defendants’ case. It did not explain the basis on which I ultimately found, in large part, that the defendants were not liable. The size of the offer show that at that stage the defendants anticipated they may face significant liability.

[49] Third, at that stage expert evidence had not been served yet. The body corporate’s offer of 10 July 2017 stated expert evidence was due to be served on 11 September 2017. The parties would have been in a better position to appraise their respective cases after reviewing that evidence.

[50] One further point warrants brief mention. The defendants advanced a further submission that the body corporate acted “capriciously” in several ways. As regards that point, I accept the submissions of the body corporate in its reply memorandum. In short, I am not convinced that the body corporate acted unreasonably.

Disbursements


[51] I turn to disbursements.

[52] The parties claim disbursements as follows.

(a) The body corporate claims expert disbursements of $47,914.39 (comprising $110,488.32, less all expert disbursements directly relating to causes of action that did not succeed, and a 33 per cent reduction to all other disbursements, to reflect partial success).

(b) The body corporate further claims procedural disbursements of
$17,350.00, being the filing fee ($1,350), setting down fee ($1,600) and hearing fee ($14,400.00).
(c) The defendants claim filing fees of $220.00.

[53] The body corporate has not itemised their disbursements, nor have they have provided invoices. It is difficult to make an assessment on whether the disbursements were reasonable in such circumstances.

[54] Nevertheless, were it not for my conclusion as regards the 7 August 2017 settlement offer, I would have allowed the disbursements as claimed. The adjustments strike me as sensible.

[55] However, in light of the 7 August 2017 offer, I consider the body corporate is only entitled to disbursements incurred before that date, with the same adjustments it submitted.

[56] In my view, it would be disproportionate in the circumstances of the present case for the defendants to bear the burden of the body corporate’s disbursements incurred after 7 August 2017. After all, the defendants made a reasonable settlement offer to eliminate the need for such disbursements. It would not be fair for them to now carry that burden.

[57] The defendants are entitled to reasonable disbursements incurred after 7 August 2017.

Conclusion


[58] In conclusion, my determinations are as follows:

(a) The body corporate is entitled to scale costs on a 2B basis for steps taken in the proceeding until 7 August 2017 with a 50 per cent reduction to reflect its partial success.

(b) The body corporate is entitled to disbursements (including procedural disbursements) incurred before 7 August 2017, with the following adjustments:

(ii) A 33 per cent reduction to remaining disbursements (excluding the procedural disbursements) incurred before 7 August 2017 to reflect the body corporate’s partial success.

(c) The defendants are entitled to scale costs on a 2B basis for steps taken in the proceeding after 7 August 2017 and disbursements incurred after that date.

[59] The parties should be able to agree costs between themselves based on this judgment. If they are unable to agree, brief memoranda (no more than two pages) setting out the steps taken and disbursements by date are to be filed by 15 June 2018. A decision will then be made on the papers.








Woolford J


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