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Smith v Ball [2020] NZHC 1976 (10 August 2020)

Last Updated: 31 August 2020

JUDGMENT OF GORDON J

[As to costs]

This judgment was delivered by me

on 10 August 2020 at 3.30 pm, pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

Solicitors: Kevin McDonald & Associates, Auckland Copy To: First Defendant

SMITH v BALL [2020] NZHC 1976 [10 August 2020]

Introduction

• [1] This is an application by the plaintiff, Sahra Smith, for costs. The application follows my judgment of 8 May 2020, which made a declaration that certain properties were held by the second defendant, Crystal Mint Developments Ltd (CMDL), on an express trust for Ms Smith. I made an order for transfer of those properties to her as executrix of her late father’s estate and other related orders.¹

• [2] The application for costs is opposed by the defendants.

Background

• [3] Ms Smith pursued eight causes of action against the defendants in relation to three residential units at 38 Dominion Street, Takapuna. Her father once owned the entire property and, in November 1993, entered into an agreement to sell it to CMDL, a company associated with the first defendant, Roger Ball. Mr Ball is the sole director of CMDL. CMDL’s shareholder is the third defendant, Crystal Mint Ltd (CML), and Mr Ball is the sole director and shareholder of CML.

• [4] The first cause of action, on which Ms Smith was successful, was that CMDL held the three units at 38 Dominion Street, Takapuna, under an express trust for her father (and so for Ms Smith, in her capacity as the executrix of her father’s estate). I determined that were it necessary, I would have found in favour of Ms Smith on two alternative causes of action alleging CML held the shares in CMDL in an express trust or that a constructive trust arose in relation to the property or the shares in CMDL.

• [5] Four other causes of action failed. Two of those causes of action were against Mr Ball personally and two, brought in the alternative to the claims against Mr Ball, were against CMDL. It was alleged that Mr Ball, acting under an enduring power of attorney for Ms Smith’s father, who had suffered a series of strokes, had transferred money from Mr Smith’s bank account to CMDL’S bank account. The funds were used to pay down debt on the properties. Mr Smith therefore did not lose the benefit

¹ Smith v Ball [2020] NZHC 944.

of those funds, as the property was held by CMDL under an express trust for Mr Smith. The eighth cause of action, alleging an illegal contract, was abandoned at the hearing.

• [6] The defendants denied all the allegations. Mr Ball appeared on his own behalf and, with leave, on behalf of CMDL and CML. Mr Ball’s defence was that there was no trust and the transaction in question was an arm’s length commercial one. That defence failed.

Costs claimed and opposition

• [7] Ms Smith seeks:

(a) Indemnity costs against CMDL and Mr Ball in the sum of $280,229 plus GST and disbursements of $42,473.80 including GST;²

(b) Or, in the alternative, increased costs against CMDL and Mr Ball of an amount the Court deems just, plus GST and disbursements of

$42,473.80;

(c) Or, in the further alternative, 2B scale costs against CMDL and Mr Ball in the sum of $65,432 and disbursements of $42,473.80 including GST.

• [8] Mr Ball opposes costs on behalf of himself and the other defendants. He submits costs should lie where they fall because the plaintiff was unsuccessful in six of the seven causes of action. Alternatively, he says scale costs only should be awarded against CMDL. Mr Ball submits no award of costs should be made against him personally because he successfully defended the causes of action against him. He further submits that indemnity costs are not justified. Mr Ball also resists the disbursement for Mr Kidd’s appearance as a witness. Mr Ball says Mr Kidd did not offer expert evidence at the hearing and his evidence only went to matters of fact.³

2. Actual legal costs were $288,025 plus GST, from which is deducted $7,796 for previous payments of scale costs arising from awards against the defendants on three occasions prior to the trial.
3. Mr Kidd had acted as solicitor for Mr Smith and, on Mr Smith’s instructions, for CMDL. Mr Kidd continued to advise Ms Smith after her father’s death. He was called as a witness for Ms Smith at the hearing.

Costs award against Mr Ball

• [9] I first address Ms Smith’s claim for costs against Mr Ball.

• [10] Rule 14.1 provides in part:

• 14.1 Costs at discretion of court

(1) All matters are at the discretion of the court if they relate to costs—

(a) of a proceeding; or

(b) incidental to a proceeding; or

(c) of a step in a proceeding.

• [11] In Carborundum Abrasives Ltd v Bank of New Zealand (No 2) Tompkins J construed the predecessor to this rule.⁴ The former rule conferred the same discretion, but with a more detailed prescription on how the discretion might be exercised by the Court. This Court has applied this authority to r 14.1 elsewhere.⁵ Tomkins J concluded “that in appropriate cases and for proper reasons the Court should be able to order a person who is not a party to those proceedings to make a payment towards the costs incurred by a party”.⁶ This principle was endorsed by the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2).⁷

• [12] The difficulty with the submission by Mr McDonald, counsel for Ms Smith, that an award of costs should be made against Mr Ball personally in these proceedings is that a basic pre-requisite required by these authorities – that the person against whom an award of costs is not a party to the proceeding – is not satisfied. This pre- requisite appears essential given the policy considerations upon which the exercise of the discretion to award costs to a non-party is based.

⁴ Carborundum Abrasives Ltd v Bank of New Zealand (No 2) [1992] 3 NZLR 757 (HC).

5. See, for example, Shanghai Neuhof Trade Company Ltd v Zespri International Ltd [2020] NZHC 987 at [22]; Target Painters & Decorators Ltd v Omid Construction Management Group Ltd [2019] NZHC 2757 at [15]- [16]; Haines v Memelink [2019] NZHC 2169 at [43]- [44]; and Loktronic Industries Ltd v Diver [2014] NZHC 1189 at [35]- [37].

⁶ At 763-764.

7. Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2004] UKPC 39, [2005] 1 NZLR 145 at [25].

• [13] In Dymocks, the Privy Council approved two statements of Tompkins J in Carborundum in its summary of relevant decisions.⁸ One addressed the concern that arises 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”.⁹ The other was that “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”.¹⁰ Tompkins J went on to explain one consequence of this action is, depending on the circumstances, that an order for costs may be made against that person:¹¹

If a 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. The relevant factors will include the financial position of the party through whom these proceedings are brought or defended and the likelihood of it being able to meet any order of costs, the degree of possible benefit to the non-party and whether, in all the circumstances, the bringing or defending of the claim - although in the end unsuccessful - was a reasonable course to adopt.

• [14] But none of these considerations apply in this proceeding. Mr Ball was a party. And he successfully defended the causes of action against him personally. Mr McDonald submits that Mr Ball can be characterised as a non-party because he was not joined as a director of CMDL. However, this cannot be correct. Mr Ball was a party to the proceeding. Ms Smith’s causes of action against Mr Ball did not include any relating to his role as a director of CMDL.

• [15] I also note that the Privy Council cites with approval Fisher J’s remark in

Arklow Investments that:¹²

... where a person is a major shareholder and dominant director in a company which brings proceedings, that alone will not justify a third party costs order. Something additional is normally warranted as a matter of discretion. The critical element will often be a fresh injection of capital for the known purpose of funding litigation.

⁸ Dymocks, above n 7, at [25].

⁹ Carborundum, above n 4, at 765.

¹⁰ Dymocks, above n 7, at [25].

¹¹ Carborundum, above n 4, at 765.

¹² Dymocks, above n 7, at [26].

• [16] Mr Ball is the sole director of both defendant companies but has not used either as a vehicle to avoid liability. He is not liable for costs because his defence was successful. Thus the principal enunciated by the Privy Council – “that, generally speaking, where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs if his claim or defence or appeal fails” – cannot assist Ms Smith in this case because Mr Ball is not a non-party and his defence to claims against him personally did not fail.

• [17] Mr McDonald addresses the factors identified by the Privy Council in Dymocks but those factors can only be engaged “where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit”. Mr Ball may have funded the proceedings for CMDL and CML, and the companies may also be insolvent as Mr McDonald alleges, but that principle applies to a non-party promoting and funding a defence. Mr Ball was a party to the proceeding.

• [18] Mr McDonald’s submission that Mr Ball funded the defence in the proceedings is also of considerably lesser force given he represented himself and the other two defendants, though it is a relevant consideration. Mr McDonald’s submissions on Mr Ball’s conduct as a director of CMDL are simply not relevant to this question or, indeed, to an award of costs. Mr Ball rightly characterises this as an attempt to relitigate the proceedings.

• [19] Lastly, Mr McDonald submits that the Court must make an award of costs against Mr Ball to maintain the high standard required of fiduciaries as it “will serve as a warning to fiduciaries that the Court will not tolerate flagrant breaches of fiduciary duties”. This Court does hold fiduciaries to a high standard. However, that is a function of remedies in equity. The purpose of a costs award is to compensate the successful party for the cost of bringing a proceeding which vindicates that party’s rights. There is no general principle that an award of costs should serve the enforcement of fiduciary duties.

• [20] For all the above reasons a costs award will not be made against Mr Ball.

Indemnity costs

• [21] In claiming indemnity costs, Mr McDonald relies on r 14.6(4)(a) and (f). Rule

14.6 in part provides:

14.6 Increased costs and indemnity costs

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

...

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

(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

...

(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.

• [22] The threshold for an award of indemnity costs is very high. In Prebble v Huata, the Supreme Court held that indemnity costs are awarded only in rare cases, usually involving breach of confidence or “flagrant misconduct”.¹³ The Court of Appeal has said indemnity costs may be awarded against a party who “has behaved either badly or very unreasonably” and “are exceptional and require exceptionally bad behaviour”.¹⁴ It is also important to acknowledge, in exercising the discretion to award costs, the general principle that an award reflects the conduct of parties during the proceedings, not prior.¹⁵ Nor is pre-proceeding conduct relevant to an award of indemnity costs.

• [23] Mr McDonald’s submissions allege three particular features of the defendants’ conduct as grounds for awarding indemnity costs. Two of them relate to Mr Ball. I

¹³ Prebble v Huata [2005] NZSC 18, [2005] 2 NZLR 467 at [6].

¹⁴ Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] 3 NZLR 400 at [27]- [28].

¹⁵ Paper Reclaim Ltd v Aotearoa International Ltd [2006] NZCA 27; [2006] 3 NZLR 188 (CA) at [160].

have found that Ms Smith’s claim against Mr Ball cannot succeed. But, for completeness, I address the submissions. The particular features are:

(a) Mr Ball’s obtaining advances during the proceeding secured by a mortgage registered prior to the commencement of proceedings against titles to the units;

(b) CMDL pursuing a defence with no reasonable prospect of success; and

(c) Mr Ball falsifying evidence (CMDL’s financial records) after proceedings commenced.

• [24] Mr McDonald alleges that Mr Ball obtained advances from a bank after the proceedings commenced secured by a mortgage previously registered over the units. If Mr Ball is in breach of his duties as trustee, by using the properties as security for private lending, then Ms Smith may have grounds to pursue and recover those funds. Obtaining advances secured by an existing mortgage over the property once the proceedings commenced cannot be characterised as the type of flagrant misconduct which meets the threshold for an award of indemnity costs. Moreover, while it may be misconduct relating to the subject matter of the proceeding, I am doubtful it is misconduct in the proceeding itself.

• [25] As to the hopelessness of CMDL’s defence, it was entitled to put its position to the Court. The defence failed. The proceeding involved complex principles of equity that a company represented by a lay litigant would struggle with in any event. The nature of the defence cannot be characterised as flagrant misconduct. Even if its prospect of success was low, CMDL’s conduct in pursuing that defence does not reach the high threshold required for an award of indemnity costs.

• [26] Finally, Mr McDonald alleges Mr Ball knowingly falsified evidence, primarily company records and financial statements. I note that Mr McDonald’s submissions on this point also focus on Mr Ball’s failure as a trustee to keep clear and accurate records. It is an effort to cast Mr Ball’s past conduct in light of my findings on an express trust. However, the authorities are clear that such conduct is not a relevant

consideration in determining indemnity costs. As to the allegation that Mr Ball knowingly gave false evidence, this was not established at trial. The contents of the financial statements were disputed and inaccuracies were identified. Mr Ball’s evidence proved wanting. But it was not established Mr Ball gave incorrect evidence, knowing it was wrong.

• [27] Mr Ball’s conduct and the conduct of CMDL did not reach the threshold for an award of costs under r 14.6(4)(a) or (f). Indemnity costs are refused.

Increased costs

• [28] Mr McDonald relies primarily on r 14.6(3)(d) for an award of increased costs. 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

...

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

...

(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.

• [29] The “other reasons” Mr McDonald points to are the same as those set out above in [23] to [26] in relation to the claim for indemnity costs. The threshold for increased costs is lower, in that the conduct by a defendant must be unreasonable, but an award of costs must still reflect the actions of the parties during the litigation and not before.¹⁶ Mr Ball’s conduct or CMDL’s conduct does not meet that threshold either, for the reasons set out above. Increased costs on this basis are not justified.

16. Bradbury v Westpac Banking Corporation, above n 14, at [27]; Paper Reclaim Ltd v Aotearoa International Ltd, above n 15, at [160].

• [30] Alternatively, Mr McDonald submits increased costs are justified under r 14.6(3)(b)(i), due to the failure by the defendants to comply with timetabling orders. Mr McDonald identifies eight steps where Ms Smith had to take additional steps due to failures by the defendants to comply with timetabling orders.

• [31] I note that scale costs were awarded against the defendants on three occasions. These awards totalled $7,796. One related to a withdrawn application for summary judgment. Two were connected with several of the case management matters listed in Mr McDonald’s schedule of “extra attendances”, including discovery and revised timetabling orders. The third matter, a third party notice against one of Ms Smith’s witnesses, arose after filing of the amended statement of claim. The application was not totally without merit as the Judge was prepared, in the circumstances, to permit the third party notice to issue subject to strict conditions. Ultimately, those conditions were not met, the third party notice did not issue and the trial proceeded as planned with some variation to the timetable.

• [32] The defendants’ failures to comply were appropriately addressed by way of costs awards at the time and did not lead to the abandonment of the trial fixture. Moreover, Ms Smith will receive scale costs for the additional attendances required by the third party notice. Increased costs are not justified on this ground either.

Refusal of costs

• [33] Mr Ball submits costs should be refused because Ms Smith was unsuccessful in six of the seven causes of action. This submission is not correct. Ms Smith was successful on one of her causes of action. Had it been necessary, judgment would have been entered on two causes of action that were alternatives to the main cause of action. She was unsuccessful on four. As referred to in [4] above, two of those were alternative causes of action. As the Court of Appeal observed in Weaver v Auckland Council, “success on more limited terms is still success”.¹⁷

• [34] Nor do I consider r 14.7(d) applies in this case. The causes of action on which Ms Smith was unsuccessful were closely related to the causes of action on which she

¹⁷ Weaver v Auckland Council [2017] NZCA 330, (2017) 24 PRNZ 379 at [26].

was successful. Mr McDonald’s written submissions presented the fourth to seventh causes of action as alternatives to the first to third causes of actions, though in oral submissions he said they were not. However, they are best characterised as alternatives. Once it was established that Mr Ball held the property on trust (whether an express or another form of trust) for Ms Smith, any application of Mr Smith’s funds by Mr Ball, pursuant to his various powers, to that property would not have been in breach of trust. However, if Ms Smith was unsuccessful on the first three causes of the action, then the payments which were the subject of the fourth to seventh causes of action would likely have been in breach of Mr Ball’s duties to Mr Smith. The factual context for all these causes of action was closely connected and I do not consider Mr Ball incurred significantly increased costs in consequence.

Costs awarded

• [35] For the reasons given above, I award Ms Smith 2B scale costs against CMDL.

• [36] Mr McDonald has filed a schedule of costs claimed. I have reviewed these items. Two are not allowed. There is no record in the Court file of a memorandum filed on behalf of Ms Smith on 31 January 2020 (though there is a memorandum filed by counsel then acting for the defendants bearing that date). There is also a claim for the cost of preparing the memorandum seeking costs. Costs claimed for preparation of the costs memorandum are not allowed.¹⁸ The costs memorandum in significant part addressed indemnity costs, increased costs and included submissions as to why costs should be ordered against Mr Ball. I have refused those parts of the claim. I allow for second counsel. The proceeding was of average complexity but the volume of documentary evidence was extensive. Costs on the 2B scale are therefore

$63,520.¹⁹

¹⁸ Parsot v Grieg Developments Ltd [2008] NZHC 1168; (2008) 18 PRNZ 995 (HC) is authority for awarding this type of cost. However, as Woolford J points out in Gibson v Official Assignee of New Zealand [2015] NZHC 3200 at [14], the authorities on this point are divided. The Court of Appeal has said in Harrington v Wilding [2019] NZCA 605 at [45]: “There is no inflexible rule that a party who is awarded costs is “entitled” to costs associated with the application for costs. Costs for each step in a proceeding are always at the discretion of the court”.

¹⁹ An award of scale costs is GST neutral: New Zealand Venue and Event Management Ltd v Worldwide NZ LLC [2016] NZCA 282, (2016) 23 PRNZ 260 at [7]- [10]. A successful party awarded scale costs is not required to account for GST and the unsuccessful party is unable to claim a GST input credit. An award of scale costs does not include provision for GST in consequence.

• [37] As to the disbursements listed in Mr McDonald’s schedule, Mr Ball objects to the inclusion of Mr Kidd’s costs as expert evidence. I agree with Mr Ball’s submission. Mr Kidd did not give expert opinion evidence. His evidence was primarily concerned with establishing fact. To the extent he expressed an opinion, it was a minor feature of his evidence. The disbursement for Mr Kidd’s fee is not allowed. The disbursements are therefore $22,098.67.

Result

• [38] I award costs in the sum of $63,520 and disbursements in the sum of

$22,098.67 in favour of Ms Smith against CMDL. The total award is $85,618.67.








Gordon J