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Water our World Holdings Limited v Pacific Eagle Capital (fka General Equity Building Society) [2019] NZHC 1645 (16 July 2019)

Last Updated: 30 July 2019

COSTS JUDGMENT OF ASSOCIATE JUDGE P J ANDREW

WATER OUR WORLD HOLDINGS LTD v PACIFIC EAGLE CAPITAL [2019] NZHC 1645 [16 July 2019]

Introduction

[1] The plaintiff has discontinued the proceedings, but the question of costs remains outstanding.

[2] This judgment contains my decision on costs. It is being dealt with on the papers following the receipt of submissions from the parties.

[3] The defendant seeks an award of costs against a non-party, Mr Ohna, pursuant to r 14.1 of the High Court Rules 2016, on the grounds that he wholly controlled and funded the plaintiff’s proceedings. It also seeks an award of indemnity costs or, in the alternative, an uplift in costs on the grounds that the plaintiff’s pleading (so the defendant alleges) rested entirely on unmeritorious allegations of fraud which the plaintiff knew to be false. The defendant also alleges that the plaintiff conducted a fraud upon Mr Ohna and sought via the proceedings to have the defendant indemnify it for liabilities arising out of that fraud.

Authority to commence proceedings

[4] Counsel for the plaintiff has raised legitimate concerns about the allegations made at [1] – [5] of the defendant’s reply submissions dated 25 June 2019. In those paragraphs the defendant implied that the proceedings were commenced by the plaintiff’s solicitors without the authority of the plaintiff or Mr Ohna as attorney of the plaintiff.

[5] In response to the plaintiff’s concern, Mr Patterson, counsel for the defendant, advised the Court and the parties by email dated 27 June 2019 that he was withdrawing (immediately) the allegation concerning authority to commence proceedings.

[6] I accordingly direct that [1]–[5] of the defendant’s reply to the plaintiff’s costs submissions dated 25 June 2019 are to be expunged from the Court records and file. I proceed to deal with the question of costs on the basis that there is no issue or allegation that the proceedings were issued without authority.

Background

[7] The plaintiff is a company registered in the United Kingdom and the defendant is a New Zealand registered building society. Mr Ohna, invested EUR 3,000,000 in the plaintiff, but his investment was not repaid. The plaintiff could not satisfy a judgment obtained against it by Mr Ohna.

[8] In the proceedings, the plaintiff sued the defendant to “repay the debt that it owes to Mr Ohna”. It claimed the defendant was liable pursuant to a banking guarantee issued by the defendant in favour of the plaintiff as beneficiary. The causes of action included fraud, negligence and deceit and sought the sum of EUR 3,450,000 in damages. The defendant says that the plaintiff cancelled the guarantee in 2012.

[9] The proceedings were controlled by Mr Ohna under a power of attorney granted to him by the plaintiff. In a letter from the plaintiff’s solicitors to the defendant dated 8 June 2018 the plaintiff’s solicitors advised that:

We act for Water Our World Holdings (WOWH) under power of attorney granted to Bernt Ohna. A copy of the power of attorney is enclosed.

[10] In October 2018, the plaintiff’s solicitors wrote to counsel for the defendant advising that Mr Ohna was funding the litigation.

[11] In the plaintiff’s costs submissions, it is expressly acknowledged that Mr Ohna had a power of attorney granted by the plaintiff and was the funder and driver of the litigation.

Relevant legal principles

[12] Rule 15.23 of the High Court Rules provides that, unless the defendant agrees or the Court otherwise orders, a plaintiff who discontinues a proceeding against a defendant must pay costs to the defendant.

[13] Increased costs may be ordered under r 14.6 where there is a failure by the paying party to act reasonably.¹

¹ Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] 3 NZLR 400 at [27].

[14] Circumstances in which indemnity costs² may and have been ordered include where allegations of fraud have been made knowing them to be false and/or the making of irrelevant allegations of fraud.³

[15] Costs are, of course, ultimately at the discretion of the Court⁴ and, so far as is possible, the costs determination should be predictable and expeditious.⁵

[16] Rule 14 of the High Court Rules is properly construed to allow the Court to make an order for costs against a non-party. In Carborundum Abrasives Ltd v Bank of New Zealand, Tompkins J held^:6

Where proceedings are initiated by and controlled by a person who, although not a party to the proceedings, has a direct personal financial interest in their result, such as a receiver or manager appointed by a secured creditor, a substantial unsecured creditor or a substantial shareholder, it would rarely be just for such a person pursuing his own interests, to be able to do so with no risk to himself should the proceedings fail or be discontinued. That will be so whether or not the person is acting improperly or fraudulently.

In many cases a major consideration will be the reason for the non-party causing a party, normally but not always an insolvent company, to bring or defend the proceedings. If the non-party does so for his own financial benefit, either to gain the fruits of the litigation or to preserve assets in which the person has an interest, it may, depending upon the circumstances, be appropriate to make an order for costs against that person.

Analysis and decision

[17] The defendant seeks indemnity costs of $44,051.04 (including GST) or, in the alternative, an uplift of scale costs based on a 2B calculation of $11,819.

[18] The plaintiff contends that it should pay costs on a 2B basis in the total sum of
$6,244 and that there is no basis for an award of either indemnity or increased costs.

[19] The critical issues I must determine are as follows:

² High Court Rules 2016, r 14.6(4).

³ Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] 3 NZLR 400.

⁴ High Court Rules, r 14.1.

⁵ Rule 14.2(g).

6. Carborundum Abrasives Ltd v Bank of New Zealand (No 2) [1992] 3 NZLR 757 (HC) at 765 approved in Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2004] UKPC 39, [2005] 1 NZLR 145 at [25].
   • (a) Whether there should be an award of increased or indemnity costs;

(b) If not, what is the correct calculation for a 2B costs award; and

(c) Whether a non-party costs order should be made against Mr Ohna.

[20] In determining whether there should be an award for indemnity costs, I agree with the plaintiff’s submission that the issue is whether there was a sufficient evidential basis for the plaintiff to make an allegation of fraud.

[21] The leading authority on pleading allegations of fraud is Schmidt v Pepper New Zealand (Custodians) Ltd where the Court held:⁷

[15] Allegations of fraud or dishonesty are very serious. They must be pleaded with care and particularity. As the authors of Bullen & Leake & Jacobs Precedents of Pleadings emphasise, counsel must not draft any originating process or pleading containing an allegation of fraud unless they have reasonably credible material which, as it stands, establishes a prima facie case of fraud – that is, material of such a character which would lead to the conclusion that serious allegations could properly be based upon it. ...

[22] The plaintiff has, with some considerable care, set out the evidential basis for the fraud allegations in its submissions dated 17 June 2019. Contrary to what the defendant contends, the evidential basis for the fraud is not simply confined to a claim of forgery based on apparently fundamentally different signatures and the assertion that the plaintiff had no motive to cancel the guarantee. It is clear that in assessing the merits of a fraud claim, the plaintiff had regard to a range of factors and concluded that, overall, there was a proper evidential basis to plead fraud. This includes the England Solicitors Disciplinary Tribunal decision dated 23 November 2016 and the T- Net transaction.

[23] The defendant’s contention in its reply submission that Mr Dixon (the signatory on the resolution at issue) may not even exist does not advance matters; it simply raises further questions about whether something untoward (as the plaintiff alleges) has occurred. I also note that the defendant did not plead to critical allegations at [16]–[17] of the statement of claim.

⁷ Schmidt v Pepper New Zealand (Custodians) Ltd [2012] NZCA 565 (footnotes omitted).

[24] In this case, both parties make serious allegations against the other. None of these allegations has been the subject of evidence tested at trial. As Associate Judge Bell held in Rintoul Group Ltd v Robson, the assessment of whether a plaintiff has the appropriate evidential basis for an allegation of fraud is not a mini-trial.⁸

[25] I find that the defendant has failed to establish a proper basis for an award of indemnity costs. There was a sufficient evidential foundation for the allegation of fraud.

[26] As to increased costs, however, I have some sympathy for the defendant’s application. The proceedings have been discontinued by the plaintiff with the only explanation provided that they are being discontinued to allow Mr Ohna to institute a fresh claim against the defendant for dishonest assistance with a breach of fiduciary duty (it is claimed that this will likely be proceeded with in England). The defendant has clearly been put to considerable cost, and the amount of costs actually incurred is significant. I accept that in circumstances where serious allegations of fraud were being made (and a substantial sum in dispute) it was necessary to incur significant costs in taking steps to defend the proceedings. However, increased costs are generally awarded to reflect how the parties acted during litigation and not before it.⁹ In the circumstances here, I find that the defendant has not established the requisite threshold. There was, as I have already concluded, a sufficient evidential basis for the fraud allegation and in those circumstances, a defendant will almost inevitably have to incur costs in responding to and investigating allegations of that kind. The plaintiff also discontinued at a relatively early stage in the proceedings and the unreasonable conduct threshold has not been made out.

[27] I accept that under r 15.23 there is a presumption that a discontinuing plaintiff pay the defendant’s costs up to the point of discontinuance (the plaintiff does not dispute that). However, the Court will not generally consider the merits of the respective cases unless they are so obvious that they should influence the costs outcome.¹⁰ I am not in a position, in this case, to assess the merits of the respective

⁸ Rintoul Group Ltd v Robson [2019] NZHC 21.

⁹ Paper Reclaim Ltd v Aotearoa International Ltd [2006] NZCA 27; [2006] 3 NZLR 188 (CA) at [160].

¹⁰ Kroma Colour Prints Ltd v Trodonicatco NZ Ltd [2008] NZCA 150, (2008) 18 PRNZ 973; and

FM Custodians Ltd v Pati [2012] NZHC 1902 at [10]–[12].

cases beyond concluding, as I do above, that there was a proper evidential foundation for the plaintiff to make the allegations of fraud. In this case, where both parties make serious allegations against each other (and as noted, where the evidence has not been tested at trial), it would be wrong to do so.

[28] I also find that I cannot, on the information available to me, make any conclusion on whether the plaintiff’s explanation for discontinuance has merit or not. The defendant has not satisfied me that the lack of merit in the plaintiff’s claim is both obvious and incontrovertible. Abandonment of a cause of action is not of itself a pointer to increased or indemnity costs.¹¹

[29] For all these reasons, I conclude that costs should be paid on a 2B basis.

[30] The plaintiff contests the calculation of $11,819 that the defendant says represents costs on a 2B basis. I find that the calculation of $6,244 put forward by the plaintiff is the correct calculation. However, in the circumstances, I am prepared to allow one day for discovery or equivalent steps taken by the defendant (step 20). I note that a discovery order was made, but a list of documents was not produced. Therefore, I make an allowance of $2,230 for step 20 which brings the total calculation for a 2B costs award to $8,474.

[31] I also find that in the circumstances of this case, where there is no dispute that Mr Ohna controlled and directed the proceedings and for his own benefit, that a non- party costs award should be made against him. The proceedings were, as the defendant submits, at all material times controlled by Mr Ohna under the power of attorney granted to him by the plaintiff.

[32] The complaint made by the plaintiff that no formal application (supported by evidence) was made in support of the award of costs against Mr Ohna as a non-party is, in my view, and on the facts of this case, without merit. Mr Ohna was clearly on notice that the defendant sought a costs award against him as a non-party and the issue

¹¹ Bradbury v Westpac Bank Corp [2009] NZCA 234, [2009] 3 NZLR 400 at [79].

has been squarely addressed in the submissions filed by the plaintiff.¹² Mr Ohna’s role is not and cannot be disputed.

[33] I conclude that both the plaintiff and Mr Ohna are to pay costs to the defendant and, in accordance with r 14.14, are jointly and severally liable for those costs.

Result

[34] I order that the plaintiff and Mr Bernt Eagle Ohna are to pay costs to the defendant on a 2B basis and in the sum of $8,474 plus disbursements as fixed by the Registrar.

Associate Judge P J Andrew

¹² The fact that counsel and his instructing solicitors no longer act for Mr Ohna or the plaintiff is not relevant. The submission filed by the plaintiff on costs dated 17 June 2019 was clearly filed at a time when counsel was acting with the full authority of Mr Ohna.