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Powell v K 2 Investment Group Limited [2021] NZHC 3565 (20 December 2021)

Last Updated: 3 February 2022

JUDGMENT OF OSBORNE J

This judgment was delivered by me on 20 December 2021 at 3.00 pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

POWELL v K 2 INVESTMENT GROUP LIMITED [2021] NZHC 3565 [20 December 2021]

Introduction

• [1] Following a trial of this proceeding, I gave judgment largely for the plaintiff (Judgment).¹ The case related to some complex property development dealings commenced in 2012 between Mr Powell and Mr Kemeny. Mr Powell by his claim centrally sought repayment of money lent to K 2 Investment Group Ltd (K2 New Zealand).

• [2] As part of the orders, I ordered K2 Investment Group Australia Pty Ltd (K2 Australia) and Mr Kemeny to pay to Mr Powell the costs and disbursements of the proceeding fixed on a 2B basis.²

• [3] I also ordered K2 New Zealand to pay to Mr Powell his reasonable solicitor/client costs and disbursements incurred in the recovery of K2 New Zealand’s indebtedness to Mr Powell, whether incurred in relation to this proceeding or to earlier steps of recovery.³ Directions were made for the filing of memoranda as to the costs and disbursements claimed.

Issues for determination

• [4] By his memorandum, Mr Campbell (for Mr Powell) seeks orders:

(a) fixing the sum payable by K2 New Zealand to Mr Powell on account of the solicitor/client costs and disbursements previously ordered; and

(b) ordering that Mr Kemeny (as a non-party on this issue) be liable for a portion of the sum ordered to be paid by K2 New Zealand.

• [5] Mr Woods (for Mr Kemeny but not having instruction from K2 New Zealand) submits that the Court is functus officio in relation to Mr Kemeny’s liability and cannot make a further costs order affecting him.

¹ Powell v K 2 Investment Group Ltd [2021] NZHC 2253 [K2 New Zealand].

² At [277(i)].

³ At [277(h)].

Issue 1

The amount of Mr Powell’s solicitor/client costs and disbursements

• [6] Mr Powell obtained judgment against K2 New Zealand on a credit contract which included a provision entitling Mr Powell to payment of the actual legal costs he incurred in recovering the debt.⁴ The costs award against K2 New Zealand flowed from that contractual provision, in accordance with r 14.6(4)(e) High Court Rules 2016.⁵

The indemnity costs regime

• [7] The relevant provisions of r 14.6 High Court Rules are two-fold. First, under r 14.6(1)(b) the Court may make an order that the costs payable are the actual costs, disbursements, and witness expenses reasonably incurred by a party (indemnity costs). Secondly, under r 14.6(4)(e) the Court may order indemnity costs if the party claiming costs is entitled to them under a contract or deed.

• [8] The principles relating to the indemnity costs in this situation were discussed by the Court of Appeal in Black v ASB Bank Ltd.⁶ In summary (as relevant here):

(a) the word “reasonable” in r 14.6(1)(b) does not import a discretion in the usual sense;⁷

(b) assessing whether indemnity costs claimed under a contract are reasonable involves the Court objectively assessing whether the tasks undertaken were those contemplated in the contract, whether the steps taken were reasonably necessary in pursuance of those tasks, whether the charge rate was reasonable, and whether any other general contract law principles deny the claimant its prima facie right to judgment;⁸ and

⁴ At [274].

⁵ At [275].

⁶ Black v ASB Bank Ltd [2012] NZCA 384 at [77]–[99].

⁷ At [78], citing Frater Williams & Co Ltd v Australian Guarantee Corp (NZ) Ltd (1994) 2 NZ ConvC 191,873 (CA) at 191,887.

⁸ At [80], citing Frater Williams, above n 7. See also Watson & Son Ltd v Active Manuka Honey Association [2009] NZCA 595 at [20].

(c) the Judge is entitled to exercise “robust judgement” as to the costs considered reasonable in all the circumstances.⁹

The amount of Mr Powell’s costs and disbursements

• [9] In terms of the Judgment (and pursuant to the terms of the loan agreement between Mr Powell and K2 New Zealand), Mr Powell is entitled to his reasonable solicitor/client costs and disbursements incurred in the recovery of K2 New Zealand’s indebtedness, whether incurred in relation to this proceeding or to the earlier steps of recovery.

• [10] The amounts initially sought by Mr Powell were under five heads:

(a) $52,421.22 — being the costs and disbursements incurred (with the law firm, Malley & Co) in 2013 in registering caveats to protect his interests and successfully seeking relief in relation to the caveats.¹⁰ The Court, on the basis Mr Powell had succeeded, provisionally found him entitled to his costs but an award of costs was not finalised.¹¹

(b) $307,951.80 — being the fees and disbursements charged by Mr Powell’s solicitors in this proceeding (Wynn Williams) between March 2017 and October 2021.

(c) $27,834.97 — being the sum charged by Wynn Williams pursuant to its fee agreement with Mr Powell, calculated as 10 per cent on the fee content of Wynn Williams’ total costs.

(d) $11,200 — being the Ministry of Justice hearing fee paid by Mr Powell directly.

⁹ At [80], citing Frater Williams, above n 7, at 191,887.

¹⁰ Powell v K 2 Investment Group Ltd [2013] NZHC 3167.

¹¹ At [88]–[89].

(e) $10,173 — being the total costs and disbursements charged by Wynn Williams for preparation of its affidavit and supporting memoranda in relation to this fixing of costs and disbursements.

Reasonably necessary tasks?

• [11] To entitle the claimant to recovery, the costs and disbursements sought must relate to tasks which were reasonably necessary in the recovery of K2 New Zealand’s debt.

• [12] The detail of Mr Powell’s legal expenses is the subject of a comprehensive affidavit of Robert Petch, a solicitor employed by Wynn Williams. He has exhibited the voluminous record of accounting as between Malley & Co and Wynn Williams on the one hand and Mr Powell on the other. That has been supported, in the case of Wynn Williams, with the full time records kept in relation to Mr Powell’s litigation, with explanations of the charge-out rates of the lawyers involved. The accounting records can be related to the legal steps taken by Mr Powell through Wynn Williams.

The Malley & Co costs

• [13] Mr Powell does not have a sound basis for an award of costs and disbursements relating to the 2013 caveat proceedings.

• [14] The costs of that proceeding were determined on 14 January 2014 when this Court made an order for the payment of costs on a 2B basis.

• [15] It is not open to Mr Powell to now claim more. Mr Campbell by a supplementary memorandum has appropriately conceded that.

The Wynn Williams costs

• [16] I am satisfied the steps taken by Mr Powell, through Wynn Williams, to recover the K2 New Zealand debt were all reasonably required for that purpose.

• [17] Mr Petch records Wynn Williams were first instructed in March 2017 on the issues that already involved a complicated factual background and became legally

complex. That complexity was subsequently reflected in the Judgment, with its 277 paragraphs.¹²

• [18] Time was taken in 2017 for the parties to negotiate (through their lawyers) a sale of one of K2 New Zealand’s (mortgaged) properties with a stakeholding put in place to protect Mr Powell’s interest. Mr Powell understandably during that period had Wynn Williams make a settlement offer (without prejudice except as to costs) which would have involved the defendants paying a much lower settlement sum than the judgment sum subsequently awarded.

• [19] Mr Powell necessarily issued this proceeding (in April 2018).

• [20] The extent of complications in the proceeding is then underlined in the steps which followed. Issues arose from the fact that Mr Kemeny, the third defendant, caused K2 New Zealand to enter an appearance and file a defence (a step which ultimately gave rise to a significant issue at the trial, resulting in the defence and counterclaim of K2 New Zealand being struck out). A counterclaim filed by the defendants (including purportedly K2 New Zealand) in itself raised complicated legal issues. The requirements of discovery were extensive and, because of the unusual nature of the commercial arrangements between the parties, gave rise on their own to a range of issues. Delays subsequently occurred in the allocation of the trial date. The defendants made a late, unsuccessful security for costs application (which, however, has already been the subject of a costs order, as explained at [23] below).

• [21] Mr Petch’s affidavit covers, in relation to each of the lawyers involved at Wynn Williams, the charge-out rates for the relevant periods. It is clear that there was a substantial degree of delegation involved, pointing to a reasonable approach (as between solicitor and client) in that regard. The charge-out rates themselves also appear reasonable (ranging over the period from $425 to $525 for a partner, $330 for an associate and $180 to $235 for an employed solicitor).

• [22] I conclude the indemnity costs claimed by Mr Powell were reasonable as between solicitor and client, being in relation to steps which were reasonably

¹² K2 New Zealand Ltd, above n 1.

necessary for the recovery of the K2 New Zealand debt and based on reasonable charge-out rates. While the total fees and disbursements initially seem very high, particularly having regard to a trial which ultimately took only three days, I find the fees of that level ultimately flowed from the range of issues — both factual and legal
— which the defendants’ numerous grounds of defence and counterclaim put into play (as it transpired, unsuccessfully).

• [23] I will not be fixing Mr Powell’s indemnity costs to include the costs of opposing the security application. In late-2020, Mr Powell successfully resisted a late application for security for costs.¹³ He then successfully sought an award of increased (not indemnity) costs. He was awarded a total sum of $9,670 on account of costs and disbursements.¹⁴ To the extent Wynn Williams’ fees and disbursements relate to the security for costs application, they fall within the same category as the Malley & Co costs and disbursements. As they were determined by this Court previously, it is not open to Mr Powell to claim any further sum on their account. Mr Campbell in his supplementary memorandum has conceded this, and has satisfactorily explained by reference to Mr Petch’s evidence the amount of costs and disbursements ($43,808.81) that relate to the security application. Those are to be deducted from Mr Powell’s original claim.

Fee premium of Wynn Williams

• [24] The financial situation in which Mr Powell found himself through the non- repayment of the K2 New Zealand loan meant that he had to enter into a special fees arrangement with Wynn Williams. Wynn Williams and Mr Powell entered into a fee agreement in May 2019 (two years before the ultimate trial). The firm effectively carried his costs and disbursements for an extended period and, in the event he was ultimately unsuccessful, would accept a discount of 50 per cent from the firm’s usual fee. If Mr Powell was successful in the litigation, he would pay Wynn Williams an additional 10 per cent above their usual fee.

¹³ Powell v K 2 Investment Group Ltd [2020] NZHC 3181.

¹⁴ Powell v K 2 Investment Group Ltd [2021] NZHC 155.

• [25] The additional 10 per cent for what became a delayed payment period of two years was as between solicitor and client clearly reasonable (if not generous) having regard to the downside for Wynn Williams had Mr Powell’s claim been unsuccessful. The premium accordingly falls within the category of actual legal costs incurred by Mr Powell in the recovery of the K2 New Zealand debt. The amount originally claimed by Mr Powell on account of the premium nevertheless needs to be reduced pro rata for the sums now excluded on account of the caveat and security costs. The pro rata reduction equates to $4,380.88.

Hearing fee

• [26] The hearing fee of $11,200 paid by Mr Powell to the Ministry of Justice is recoverable as a disbursement under r 14.12(1)(b)(i) High Court Rules.

Costs of evidence and memoranda for the determination of costs and disbursements

• [27] The task of preparing and providing the appropriate evidence to establish Mr Powell’s entitlement to the indemnity costs and disbursements was necessarily more time consuming than would occur in relation to more straightforward party/party costs issues. Mr Petch appropriately provided detail as to the time taken and fees charged in relation to the preparation of his evidence and the memorandum in relation to indemnity costs.

• [28] I am satisfied that the fees and disbursements charged ($10,173) were reasonable as between solicitor and client having regard to the material that had to be put before the Court and the value of the costs and disbursements at stake.

Amended calculations

• [29] The amended calculation of Mr Powell’s recoverable fees and disbursements as charged by Wynn Williams is therefore:

• [30] The amended calculation of the fee premium payable by Mr Powell to Wynn Williams is therefore:

• [31] The resulting total of Mr Powell’s claimable costs and disbursements is:

• [32] I am satisfied that $308,970.08 represents the amount of costs and disbursements to which Mr Powell is entitled as his reasonable solicitor/client costs and disbursements (in addition to the costs awards previously made).

Contribution to indemnity by Mr Kemeny?

Background

• [33] In the property development enterprise embarked upon in 2012 by Mr Powell and Mr Kemeny, K2 New Zealand was to manage two property development businesses (with Mr Powell making his loan to K2 New Zealand). Because, as I found in the Judgment, Mr Kemeny had without authority purported to represent K2 New Zealand and to have a defence and counterclaim filed in its name, Mr Powell obtained his costs judgment against K2 New Zealand. But, through the ownership arrangements between Mr Powell and Mr Kemeny that means that Mr Powell would ultimately bear 50 per cent of the cost of any payment to be made by K2 New Zealand to him (Mr Powell).

• [34] For this reason, Mr Powell seeks an order that Mr Kemeny contribute to K2 New Zealand’s indemnity costs payment. That said, through counsel, Mr Powell

recognises that such contribution by Mr Kemeny to the award against K2 New Zealand should be reduced by the sum of $66,663 (representing the sum of scale costs awarded against Mr Kemeny and the second defendant on a party/party basis) should Mr Kemeny and/or K2 Australia pay those scale costs to Mr Powell.

• [35] Mr Campbell submitted that Mr Kemeny should be ordered in this case to contribute substantially to the indemnity costs payable by K2 New Zealand because:

(a) it was Mr Kemeny who caused K2 New Zealand’s defence and counterclaim to be filed;

(b) Mr Kemeny was found not to have the actual or implied authority to do so;

(c) Mr Kemeny was on notice of the unlawfulness of his actions in doing so;

(d) Mr Kemeny’s steps, followed by the vigorous defence of the claim, was the cause of almost all of K2 New Zealand’s costs;

(e) K2 New Zealand should not be solely responsible for that liability;

(f) creditors of K2 New Zealand will be disadvantaged because, if K2 New Zealand is left to bear the indemnity costs, there will be less funds available in its liquidation after satisfaction of secured debts; and

(g) Mr Powell’s financial recovery is likely to be jeopardised should Mr Kemeny not be required to contribute to K2 New Zealand’s payment of costs.

The applicable legal regime

• [36] Mr Campbell invoked the Court’s powers under r 14.6 High Court Rules to order the payment of indemnity costs in two particular situations:

  (a) under r 14.6(4)(a) where a party has acted vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing, or defending a proceeding or a step in a proceeding; and

(b) under r 14.6(4)(f), where 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.

• [37] Mr Campbell referred to the decision of Minister of Education v H Construction North Island Ltd (in rec and in liq).¹⁵ In that case, a parent company of a defendant was ordered to pay non-party costs. The reasoning for this was summarised by Downs J as follows:¹⁶

...McConnell authorised Hawkins to vigorously defend a claim that should have been settled; knew HGL was paying Hawkins’ legal fees and disbursements because Hawkins could not; was complicit in wielding Hawkins’ likely insolvency as a weapon; and guaranteed representation for its subsidiary when Hawkins would otherwise have been unrepresented. In combination, this constitutes the “something other” required for non-party costs to be just.

• [38] Mr Campbell submitted that similar factors apply in this case. Mr Kemeny caused K2 Australia’s defence and counterclaim to be filed and the defence to be pursued, taking advantage of the likelihood that K2 New Zealand would be unlikely to meet its debts — what William Young P in Kidd v Equity Realty (1995) Ltd referred to as the “heads I win, tails you lose” approach to litigation.¹⁷

Functus officio?

• [39] Mr Campbell submitted, notwithstanding the award of party/party costs payable by Mr Kemeny (and K2 Australia), this Court is not functus officio in relation to any contribution Mr Kemeny should make to the costs payable by K2 New Zealand. That is because, he submits, the Court has not addressed the discrete issue of his liability in that regard.

¹⁵ Minister of Education v H Construction North Island Ltd (in rec and in liq) [2019] NZHC 1459 (2019) 24 PRNZ 549.

¹⁶ At [64].

¹⁷ Kidd v Equity Realty (1995) Ltd [2010] NZCA 452 at [20].

• [40] Mr Campbell properly submitted that Mr Kemeny ought to have the opportunity to address the Court on these matters.

• [41] Mr Woods filed a brief memorandum in response. He first recognised (responsibly) that he did not have instructions to respond on behalf of K2 New Zealand, he therefore did not make a submission for K2 New Zealand.

• [42] On behalf of Mr Kemeny, Mr Woods submitted that the Court has determined issues relating to the costs payable by K2 New Zealand, which must include any question of contribution by Mr Kemeny.

• [43] Mr Woods further submitted this is not a situation in which the Court may resort to its inherent jurisdiction to set aside orders without the necessity of an appeal. In particular, he submitted, the costs orders made cannot properly be described as nullities (of the nature identified by the Court of Appeal in R v Smith).¹⁸

• [44] Mr Woods submitted in this case there has neither been a failure of procedure or a miscarriage of justice.

• [45] In reply, Mr Campbell submitted that the functus officio submission missed the point that the order sought relates to a costs liability as between the first and third defendants, with the third defendant required to contribute to the costs payable by the first defendant.

Discussion

• [46] The basis upon which K2 New Zealand was ordered to pay indemnity costs was it was entitled to such costs under the loan agreement. K2 New Zealand was the relevant party (in terms of r 14.6(4)) for the purpose of that order.

• [47] The appropriate basis in this case upon which to seek contribution or indemnity from another person to the costs K2 New Zealand is required to pay is by reference to the Court’s powers in relation to non-parties. It happens that Mr Kemeny was also a

¹⁸ R v Smith [2002] NZCA 335; [2003] 3 NZLR 617 (CA).

party in this proceeding, sued and counterclaiming in his own right. But in terms of the claims as between Mr Powell and K2 New Zealand, Mr Kemeny’s involvement was made in the nature of a non-party.

• [48] The leading decision on non-party costs is that of the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) (Dymocks).¹⁹

• [49] This Court’s power to make orders for costs against non-parties arises through the discretion contained in r 14.1 High Court Rules.²⁰

• [50] Relevant principles identified by the Privy Council in Dymocks include:

(a) costs orders may be made against non-parties “exceptionally”, in the sense that the case is outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. The ultimate question is whether, in all the circumstances, it is just to make the non-party’s costs order;²¹

(b) generally speaking the discretion will not be exercised against “pure funders”;²² and

(c) justice will ordinarily require a non-party who not merely funds proceedings but substantially also controls or at least benefits from them to pay the successful party’s costs. That is because the non-party then is the “real party” to the litigation.²³

• [51] In the judgment of the High Court of Australia in Knight v FP Special Assets Ltd, in a passage later adopted by the Privy Council in Dymocks, Mason CJ and Deane J referred to situations where non-party costs will be appropriate, including where the

¹⁹ Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2004] UKPC 39, [2005] 1 NZLR 145.

²⁰ At [17], approving Carborundum Abrasives Ltd v Bank of New Zealand (No 2) [1992] 3 NZLR 757 (HC).

²¹ At [25(1)].

²² At [25(2)], citing Hamilton v Al Fayed (No 2) [2002] EWCA Civ 665, [2003] QB 1175.

²³ At [25(3)], approving Knight v FP Special Assets Ltd [1992] HCA 28, (1992) 174 CLR 178 at 192–193.

non-party has played an active part in the conduct of the litigation and where the non- party has an active interest in the subject of the litigation.²⁴

• [52] In terms of the “exceptional” requirement under Dymocks, the circumstances relating to the steps taken by Mr Kemeny to have K2 New Zealand purportedly defend Mr Powell’s claim and pursue a counterclaim are very much outside the ordinary run of cases. As found in the Judgment, Mr Kemeny’s solicitors filed and conducted a defence and counterclaim on behalf of K2 New Zealand without having the necessary authorisation of the company to do so.²⁵

• [53] Mr Kemeny at the same time pursued (purportedly again for K2 New Zealand) an argument that the loan agreement was invalid despite the obvious application of the “indoor management rule” under s 18(1) Companies Act 1993 — a defence (based on the proviso in s 18(1) of the Act) which was subsequently abandoned in the course of the defendants’ closing submissions at trial.²⁶

• [54] The evidence at trial clearly established both Mr Powell and Mr Kemeny had lost much through their dealings with Bronwynne Durney. Ms Durney was originally Mr Kemeny’s de facto partner but later (as sole director and sole shareholder of K2 New Zealand on the Companies Register) was the cause of significant losses.²⁷ What became clear in the course of the trial was that Mr Kemeny was seeking to limit his personal losses flowing from the problems caused by Ms Durney’s dealings — that was through the defences and counterclaims filed in this proceeding aimed at limiting, if not eliminating, any recovery by Mr Powell on account of the funds he had lent to K2 New Zealand.

• [55] This was the clearest of cases in which a non-party played an active part in the conduct of litigation while having a substantial financial interest in the subject of the litigation. Without Mr Kemeny’s involvement, Mr Powell would readily have obtained a judgment against K2 New Zealand for the relief. Instead, because the

²⁴ Knight v FP Special Assets Ltd, above n 23, at 595.

²⁵ K2 New Zealand, above n 1, at [130].

²⁶ At [136]–[147].

²⁷ At [5]–[6].

proceeding was defended, ultimately took Mr Powell more than three years to obtain judgment.

• [56] The fact Mr Powell’s application for an order requiring contribution from Mr Kemeny to the costs K2 New Zealand has been ordered to pay is made after that event does not create a jurisdictional bar to the making of such an order. Determination by the Court of costs as between the parties does not preclude a party from making a fresh and separate application against a non-party.²⁸ The Court, in making the party/party orders for costs in the Judgment was not purporting to determine all issues of costs including the involvement Mr Kemeny may have had in the conduct of litigation purportedly on behalf of K2 New Zealand. The jurisdiction to make such an order subsists.

• [57] Having regard to the full control Mr Kemeny exercised over the defences and counterclaims of K2 New Zealand, his liability in relation to the indemnity award made against K2 New Zealand should be for the full indemnity costs sum of

$308,970.08 to be awarded against K2 New Zealand, but subject to reduction, as follows:

Total solicitor/client fees and disbursements $409,580.99 LESS — Malley & Co costs $52,421.22

• — security for costs $43,808.81
• — pro rata premium $4,380.88
• — notional judgment by default²⁹ $30,000.00
• — notional priority and caveat issues³⁰ $50,000.00

$228,970.08

²⁸ Love v Auburn Apartments Ltd (in rec and in liq) [2013] NZHC 851 at [47].

²⁹ Mr Petch provided detail and an estimate in relation to the costs which Mr Powell would have incurred in obtaining a default judgment against K2 New Zealand in any event, and proposed an allowance of $30,000 which I find appropriate.

³⁰ Mr Petch similarly estimated the costs Mr Powell would have incurred in any event in relation to priority and caveat issues, and proposed an allowance of $50,000, which I find appropriate.

Orders

• [58] I order:

(a) K2 Investment Group Ltd (K2 New Zealand) shall pay to Richard Owen Powell (Powell), Powell’s reasonable solicitor/client costs and disbursements in the sum of $308,970.08;

(b) Gabor Kemeny (Kemeny) is jointly and severally liable with K2 New Zealand for the costs award at [58(a)] above to the extent of
$228,970.08; and

(c) the liabilities of K2 New Zealand and Kemeny under [58(a)] and [58(b)] above will each reduce by $66,663 upon Powell being paid that sum on account of previous costs awards.

Osborne J

Solicitors:

Wynn Williams, Christchurch Anthony Harper, Christchurch