In this edition:

When may prior negotiations be considered in interpreting contracts?
In Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, the Supreme Court considered the extent to which the Court may examine extrinsic material, including prior negotiations, when interpreting a contract. more ...

Supreme Court confirms three year limitation period under Fair Trading Act 1986 applies to Commerce Commission
In Commerce Commission v Carter Holt Harvey Limited [2009] NZSC 120, the Supreme Court has confirmed that, when the Commerce Commission brings proceedings for compensation on behalf of consumers under section 43 of the Fair Trading Act 1986, it is subject to the three year limitation period. more ...

Excluding liability for consequential losses
Readers may be surprised that, notwithstanding that liability for consequential loss is so regularly excluded or limited, until recently there was no binding authority in New Zealand on what "consequential loss" actually meant. The recent High Court decision of Oceania Furniture Limited v Debonaire Products Limited (HC Wellington, Clifford J, CIV-2008-485-1701, 27 August 2009) has clarified this. more ...

Financial services disputes resolution scheme
On 8 December 2009, the Minister of Consumer Affairs announced that Financial Services Complaints Limited ("FSCL") had become the first body to apply to set up a financial sector consumer disputes resolution scheme under the Financial Service Providers (Registration and Dispute Resolution) Act 2008. more ...

Search And Surveillance Bill proposes extensive new surveillance powers 
The purpose of the Search and Surveillance Bill is to "reform the law to provide a coherent, consistent and certain approach in balancing the complementary values of law enforcement and human rights". The Bill also "provides for the appropriate legislative powers to enable law enforcement and regulatory agencies to extract electronic information and use surveillance devices in order to investigate and combat criminal activity". more ...

Limitation Bill 
Fundamental changes to limitation periods in New Zealand are proposed. more ...

Costs round up
A number of recent decisions clarify and contrast the approach of the Courts to costs in civil and criminal cases which depart from the norm. more ...

One judge, eight experts, one hot tub
2009 saw the rather evocative concept of an expert witness "hot tub" continue to gain acceptance in the High Court: Commerce Commission v Cards NZ Ltd (HC Auckland, CIV-2006-485-2353 and CIV-2006-485-2693, Asher J and Dr Lattimore, 27 July 2009).  A "hot tub" is an alternative way of hearing from expert witnesses. more ...

Insurance company admits possible breach of the Fair Trading Act 1986
A recent out of court settlement between the Commerce Commission and Beneficial Insurance Limited highlights the potential risks to the insurance industry of Fair Trading Act liability. more ...

Review and removal of liquidators
The appointment of ineffectual or, worse, "friendly" liquidators by shareholders and boards, particularly in the case of closely held companies, is sometimes an unfortunate side-effect of voluntary liquidation.  Two High Court decisions have shed light on the Court's approach to reviewing the appointment of a liquidator under the Companies Act 1993. more ...

Update on new District Court Rules
The new District Court Rules came into effect on 1 November 2009.  They represented a fundamental procedural shift in how claims for less than $200,000 are dealt with. more ...

In Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, the Supreme Court considered the extent to which the Court may examine extrinsic material, including prior negotiations, when interpreting a contract.

Bay of Plenty Energy Ltd ("BOPE") had disputed the validity of the termination by National Gas Corporation ("NGC") (now the appellant, Vector Gas Ltd) of an agreement to supply gas.  As a result, BOPE and NGC needed to resolve interim supply pending the resolution of the dispute over termination. The parties' solicitors exchanged correspondence and the last letter concluded an interim agreement.

The question for the Supreme Court was whether the expression "$6.50 per gigajoule" in the interim agreement was inclusive or exclusive of supply costs (the interim agreement was silent on the matter of supply costs).  

The test for interpreting contracts is set out in Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 All ER 98 (applied in Boat Park Limited v Hutchinson [1999] 2 NZLR 74).  That case provides that the meaning of a contract is a meaning which the document would convey to a reasonable person having the background available to the parties at the time they entered the contract, but excluding the prior negotiations and declarations of subjective intent.

However, the exclusion of prior negotiations is not absolute and does not apply if the documents containing the prior negotiations:

• shed light on the parties' knowledge of background facts or circumstances (which can include the subject matter of the contract) with reference to which they use the words in the contract;
• establish a prior agreement between the parties as to a "special dictionary meaning" of the words; or
• are relied on to support a claim for rectification of the contract or estoppel.

The majority of the Supreme Court in Vector Gas Ltd v Bay of Plenty Energy Ltd adopted the test in Investors Compensation Scheme Limited v West Bromwich Building Society, and each of the Justices came to the view that one or more of the above exceptions applied to enable the parties' prior negotiations to be examined.

Justice Tipping also commented on one of his previous judgments which is considered the leading case on admissibility of post contractual conduct, Wholesale Distributors Ltd v Gibbons Holdings Ltd [2008] 1 NZLR 277.  His Honour noted in that case that the same test of admissibility should apply to post contractual conduct as to prior negotiations (the touchstone being relevance).  In Vector Gas Ltd v Bay of Plenty Energy Ltd, Justice Tipping explained that his previous comment in Wholesale Distributors Ltd v Gibbons Holdings Ltd, that only "mutual" post contractual conduct would be admissible, was only intended as a way of excluding evidence which solely demonstrated a party's subjective intention or understanding.  His Honour explained that a simpler and clearer way of articulating this point was to focus on whether evidence (pre contractual or post contractual) tended to establish a fact or circumstance capable of demonstrating objectively the meaning that all of the parties to a contract intended the words to bear.

The decision in Vector Gas Ltd v Bay of Plenty Energy Ltd is a reminder that, no matter how clear the words of a contract may seem at the time they are agreed, the court has the ability to look at the background context to a contract.  It is useful to bear in mind that prior negotiations will be considered by the court if they shed some objective light on the meaning of a contract.

In Commerce Commission v Carter Holt Harvey Limited [2009] NZSC 120, the Supreme Court has confirmed that, when the Commerce Commission brings proceedings for compensation on behalf of consumers under section 43 of the Fair Trading Act 1986, it is subject to the three year limitation period.

The decision was the latest round in litigation between the Commerce Commission and Carter Holt Harvey in relation to alleged misleading and deceptive conduct in relation to the grading of timber.  In 2006, CHH pleaded guilty to 20 charges brought by the Commission.  The Commission then applied for compensation under section 43 of the Fair Trading Act 1986 on behalf of those consumers who had suffered loss through CHH's breaches of the FTA.  Section 43(5) provides:

5. An application under subsection (1) may be made at any time within 3 years after the date on which the loss or damage, or the likelihood of loss or damage, was discovered or ought reasonably to have been discovered.

The charges had been under investigation by the Commission since October 2002 when it received a complaint from an industry source.  The application under section 43 was brought by the Commission on 27 October 2006.  Carter Holt Harvey applied to strike out the application on the basis that the Commission had known, or ought to have known on or before 26 October 2003 that loss or damage had been caused by the contravening conduct and the application was therefore time-barred.  In particular, CHH relied on an affidavit filed by the Commission in support of search warrants in October 2003 which referred to the results of tests undertaken on timber which had been graded by CHH.  CHH's strike out application was unsuccessful in the High Court, successful in the Court of Appeal but reversed by the Supreme Court on the grounds that there was insufficient evidence that loss or damage arising from misleading conduct had been discovered, or ought reasonably to have been discovered, by 27 October 2003.  The Supreme Court decision clarifies:

• whose knowledge is relevant to when time starts to run under section 43(5) - the person making the application (in this case, the Commission) or the person alleged to have suffered loss; and
• the degree of knowledge required before time starts to run.

Knowledge

The trigger for the limitation period under section 43 is the same as in tort.  The complication under the FTA is that an application under section 43 need not be made by the person who actually suffered loss. The purpose of this provision was to facilitate the consumer protection role of the FTA where the loss of an individual may not of itself warrant standalone proceedings.  However, section 43(5) does not state whose discovery is relevant.

The majority of the Supreme Court adopted the approach of Justice Hammond in the Court of Appeal, namely that it is the knowledge of the person making the application (in this case the Commission) which is relevant.  The majority considered that section 43(5) does not draw any distinction between applications made by the person who in fact suffered the loss and applications made on their behalf.  It noted that the subsection speaks of "an application" in a generic way; there is no suggestion that the position differs depending on who makes the application.

The majority was mindful that, in theory, this interpretation would allow a person who was already out of time to simply nominate another person who was not statute barred to make the application on their behalf.  However, the Court considered this potential difficulty was theoretical rather than practical because "no one could be ordered, pursuant to such an application, to pay compensation for loss or damage suffered by a person who was already time-barred at the time the application was made" (para [20]).

The Chief Justice, in a separate judgment, endorsed the approach of Justice Chambers and Justice Baragwanath in the Court of Appeal, namely that discovery by either the loss sufferer or the applicant would trigger the limitation period.

Likelihood of loss or damage

The question was whether "likelihood" was forward or backward looking.  In other words, does it apply to future as well as present losses, or only to present losses?  The majority upheld the reasoning of Asher J in the High Court that the reference is forward looking.  In short, time starts to run when the applicant discovers or ought reasonably to have discovered that loss or damage has already occurred, or is likely to occur in the future.

Discovery

The Court identified two limbs to the question:

• the degree of awareness an applicant must have of loss or damage before being found to have discovered it; and

• how likely the suffering of loss or damage must be before it can be said to have been discovered.

As to the first question, the majority held it was neither necessary nor desirable to attempt a quantitative description of the knowledge required for "discovery" - an applicant is either aware or not.

As to the second question, the majority held that the requisite degree of likelihood is that loss is more probable than not.  Time should not start running when past loss is just a mere possibility or something that could well have happened.  Nor should the commencement of the three years be deferred until past loss is a near certainty. 

"The" loss or damage

The Court also considered whether the use of the definite article ("the loss or damage") required the applicant to become aware of the actual loss or damage as ultimately established.  The Court held it did not.  It is sufficient that the applicant be aware of more than minimal loss or damage without the need for any greater specificity as to the nature or amount of that loss or damage. 

The Court observed that in cases where there is more than one class of loss sufferer, it does not necessarily follow from the fact that the Commission may have discovered or ought reasonably to have discovered the loss suffered by one class that it will or should also have discovered that loss has probably been suffered by another class.  That will depend on the particular circumstances.

Readers may be surprised that, notwithstanding that liability for consequential loss is so regularly excluded or limited, until recently there was no binding authority in New Zealand on what "consequential loss" actually meant.  The recent High Court decision of Oceania Furniture Limited v Debonaire Products Limited (HC Wellington, Clifford J, CIV-2008-485-1701, 27 August 2009) has clarified this.

Debonaire assembled and supplied furniture to several large New Zealand retailers.  It entered into a supply agreement with Oceania whereby Oceania agreed to supply and deliver furniture and componentry from China as ordered by Debonaire.  The agreement required that Oceania do so in a "timely fashion and in good order, insofar as it was within [Oceania's] control to do so".  

The relationship deteriorated during 2007 before the agreement ended in October of that year.  Subsequently, Oceania successfully sought summary judgment for ten container loads of componentry that Debonaire had ordered but not paid for.

However, a number of orders had been delivered late, or not at all, with Oceania redirecting orders to another buyer.  Debonaire counterclaimed against Oceania for loss of profits, alleging Oceania had breached exclusivity provisions and the obligation to supply in a timely fashion and in good order.  In particular, Debonaire claimed loss of profits as a result of termination of its relationship with one of the big retailers, lost sales to existing customers, and lost opportunity to capitalise when a major competitor went out of business in early 2007.

Oceania submitted that its liability for the loss of profits claimed by Debonaire was limited by the terms of the agreement which provided that Oceania "is not liable for any consequential, indirect or special damage or loss of any kind".

On the basis of UK authority, Debonaire argued that the exclusion clause in the agreement only applied to liability for losses which fell within the second limb of the test in Hadley v Baxendale (1854) 9 Ex 341 for remoteness of damages.  The test distinguishes between: 

• losses that could reasonably be considered to arise naturally from the breach; and
• losses that could reasonably be supposed to have been in the specific contemplation of the parties when they contracted as a probable result of the breach. 

The English Court of Appeal's approach is that, in the absence of any contrary indication in the contract, the distinction between direct and indirect / consequential loss will be drawn along the same lines ie "indirect and consequential losses" fall within the second limb of Hadley v Baxendale.

This approach has been criticised as being illogical and inconsistent with the natural meaning of the words "consequential loss".  In Australia, the Victorian Court of Appeal departed from this approach in Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd (2008) 19 VR 358, [2008] VSCA 26.  The Court held that:

the true distinction is between 'normal loss', which is loss that every plaintiff in a like situation will suffer, and 'consequential losses', which are anything beyond the normal measure, such as profits lost or expenses incurred through breach.

Faced with this fork in the road, the Court in Oceania adopted the Australian approach over the UK approach.  The Australian approach focuses on the ordinary commercial meaning of the words "consequential losses" as used in the particular contract in accordance with normal principles of contractual interpretation.  In Oceania, that meant that Oceania would not be liable for any loss other than those that arose directly from, or were immediately associated with, the obligation to supply the goods as agreed or the obligation not to sell any goods in breach of the exclusivity provisions.

In light of Oceania, a clause which excludes liability for "consequential loss" should be given its ordinary commercial meaning, in light of the particular contract.  Depending on the context, this may or may not cover loss of profits.

Debonaire claimed damages for:

• Lost opportunity to generate new business.  The Court held that this was consequential loss and therefore liability was excluded.

• "Direct" loss of profits as a result of Oceania's failure to deliver.  The Court held this was not excluded.

• Loss of profits arising from damage to Debonaire's reputation and loss of customers.  The Court held this was excluded.

"Catch all" exclusions of consequential loss may not in fact catch all losses of profit.  If parties intend to exclude, for example, all loss of profits, or other heads of loss, the safest course would be to specifically set them out.  Otherwise, there is a risk that in the circumstances they will be regarded as direct rather than consequential losses. 

On 8 December 2009, the Minister of Consumer Affairs announced that Financial Services Complaints Limited ("FSCL") had become the first body to apply to set up a financial sector consumer disputes resolution scheme under the Financial Service Providers (Registration and Dispute Resolution) Act 2008. 

The Act is intended to promote consumer confidence in financial service providers by improving consumers' access to redress from financial service providers by providing dispute resolution schemes.  By the end of 2010 every financial service provider must be a member of either an approved dispute resolution scheme, or the reserve scheme, in respect of a financial service provided to the public.  "Financial service provider" means a person who provides or offers to provide a financial service. 

When considering an application by a body to become an approved dispute resolution scheme, the Minister must have regard to a number of mandatory considerations in light of the Act's guiding principles of accessibility, independence, fairness, accountability, efficiency, and effectiveness. 

Once approved, a dispute resolution scheme must issue rules about that scheme which provide, amongst other things:

• which types of financial service providers may be members;

• how complaints about a member may be made;

• that complaints about members must be investigated in a way that is consistent with the rules of natural justice;

• that complaints about members may be made relating to any of the following things:

  • breaches of contract by the member;
  • breaches of statutory obligations by the member;
  • breaches of industry codes by the member; and
  • any other matters provided for in the rules.

• any information may be considered in relation to a complaint and any inquiry made that is fair and reasonable in the circumstances;

• the remedial action that a scheme can impose on a member to resolve a complaint and how remedial action may be enforced;

• that the scheme will not charge a fee to any complainant to investigate or resolve a complaint;

• a resolution of a complaint about a member of the scheme is binding on the member (on the face of the Act there is no requirement that the member must accept the resolution); and

• that the complainant may take alternative Court action against the member.

Significantly in respect of the last three points, the Act is silent on any right of appeal or review, the qualifications of the persons who will be adjudicating the complaints, and the maximum amount of any complaint.

While speedy, cost-effective determination of disputes is in the interests of customers and financial service providers alike, in "mis-selling" cases, there may be significant disputes of fact and significant sums at stake.  With less than a year before implementation of this compulsory scheme, it remains to be seen who will actually be exercising the broad inquisitorial powers contemplated by the Act in resolving these disputes.

At the end of 2009, the Minister indicated that she expected to make a recommendation in the New Year on Financial Services Complaints Limited's application.  The Minister has not released her decision yet but it cannot be far away.

The purpose of the Search and Surveillance Bill is to "reform the law to provide a coherent, consistent and certain approach in balancing the complementary values of law enforcement and human rights".  The Bill also "provides for the appropriate legislative powers to enable law enforcement and regulatory agencies to extract electronic information and use surveillance devices in order to investigate and combat criminal activity".

In practice, this means that, amongst other things, the Bill proposes to confer extensive new surveillance powers on non-Police regulatory agencies which currently have search powers.  These agencies include, for example, the Commerce Commission.  Section 46 provides two conditions for issuing a surveillance device warrant:

• Reasonable grounds to suspect that an offence has been, or is being committed.

• Reasonable grounds to believe that the proposed use of the surveillance device will obtain information that is evidential material in respect of the offence.  Subject to certain limited exceptions and emergencies, an enforcement officer who wishes to intercept private communications, use a tracking device, observe and record private activity in private premises by means of a visual surveillance device.

Significantly, clause 46 does not on its face require an enforcement officer to satisfy the Judge that other less intrusive investigative approaches have been tried or would not succeed.

Clause 50(3)(g)(iii) provides that an enforcement officer carrying out the activities authorised by the warrant may do any or all of the following to install, maintain, or remove the surveillance device, or to access and use electricity to power the surveillance device using any force that is reasonable in the circumstances:

• Enter any premises, area, or vehicle specified in the warrant.

• Break open or interfere with any vehicle or other thing.

• Temporarily remove any vehicle or other thing from any place where it is found and return it to that place.

The statutory regimes to which the Bill applies range from the Commerce Act 1986 and Major Events Management Act 2007 at one end of the spectrum, to the Dog Control Act 1996 at the other.

As presently drafted, the Bill raises the following issues:

• Whether, in pursuit of uniformity, it is really necessary for all of the agencies covered by the Bill to have such extensive surveillance powers.

• Whether it was intended to lower the bar to obtain a surveillance order and, if so, why. 

Although it is still early days, there is a sense of a "one size fits all" search and surveillance regime about the Bill which, in an effort to harmonise the search and surveillance provisions of a large number of disparate acts grants extensive search and surveillance powers to statutory officers who may not need them.

Fundamental changes to limitation periods in New Zealand are proposed.

The law of limitation seeks to balance the rights of plaintiffs to bring claims against the rights of defendants to not be subjected to stale claims.  In New Zealand, the Limitation Act 1950 prescribes the limitation period for most claims (other specific limitation periods are prescribed in around 30 other Acts).  Three Law Commission reports - in 1988, 2000 and 2007 - have now recommended that the Act be updated.  In 2007, the Supreme Court observed in Trustees Executors Limited v Murray & Ors [2007] NZSC 27 that:

[76] What is required in New Zealand, and has been required for some considerable time, is a complete legislative overhaul of the Limitation Act… The surgery now required is beyond the proper province of the courts.

That "surgery" is under way.  The Justice and Electoral Committee has now heard submissions on the Limitation Bill which, once enacted, will repeal and replace the Act.

For most claims, the Bill retains the current primary limitation period of 6 years.  The fundamental changes proposed in the Bill include:

• The start date of the limitation period for most claims would be the date of the act or omission on which the claim is based rather than the date on which the cause of action "accrued", as is the case under the Act.  A cause of action "accrues" when everything which would entitle the plaintiff to the judgment of the court on the relevant cause of action has happened.  The proposed change would, for example, synchronise the limitation period for claims in contract and negligence.  By contrast, at the moment, a cause of action in contract accrues when the breach occurs whereas a cause of action in negligence does not accrue until damage is suffered.
• The Bill introduces the new concept of a "money claim" i.e. a claim for monetary relief whether at common law, in equity, or under an enactment.  The inclusion of claims for equitable damages in the definition of a money claim is controversial in that it cuts across longstanding equitable principles by imposing a limitation period on equitable claims whereas currently the default position is that there is none.
• The Bill introduces, for money claims and certain other claims a three year "late knowledge period" that:

  • applies if the claim is made after its primary limitation period and the claimant has "late knowledge" of the claim i.e. at the close of the start date of the claim's primary limitation period, the claimant neither knew, nor ought reasonably to have known, key facts that the claimant must know in order to make the claim; and

  • starts on the date when the claimant gained, or ought reasonably to have gained, knowledge of those key facts.
• Under the Act, in the absence of fraud, time runs for most claims even if they are not reasonably discoverable.  The Bill prevents liability for an indeterminate time by introducing a defence to a claim made within its late knowledge period but after a longstop period of 15 years after the date of the act or omission on which the claim is based.

If enacted, the new Act will only affect claims based on an act or omission after 30 June 2010.

The select committee is due to report back on the Bill on 2 April 2010.

A number of recent decisions clarify and contrast the approach of the Courts to costs in civil and criminal cases which depart from the norm.

Criminal

In the recent case of Field v Police (High Court, New Plymouth, CRI-2007-443-000010, 12 February 2010, Duffy J), the High Court overturned a conviction against Mr Field for theft.  Mr Field successfully sought an award of costs under the Costs in Criminal Cases Act 1967.

Whilst the majority of cases that seek costs under the Act are typically associated with conventional "crimes" such as theft, burglary and other offences contained under the Crimes Act 1961, it is important to appreciate that the principles discussed in these cases are equally applicable to regulatory prosecutions against individuals or corporations under the Securities Act 1978, Commerce Act 1986, Fair Trading Act 1986, Health and Safety in Employment Act 1992 and the like.

Unlike civil cases, where the default position is that the loser pays the winner's costs, there is no presumption for or against costs in criminal cases.  Indeed s 5(4) of the Act expressly provides that no defendant shall be granted costs by reason only of the fact that he has been acquitted, discharged, or a charge withdrawn.  Instead, the Act confers a broad discretion on the Court as to whether to award costs, having regard to relevant principles as set out in the Act. 

These principles were discussed at length most recently in the High Court by Duffy J in the case of Field where Mr Field sought total indemnity costs of $16,467 (in respect of the first instance and appellate hearings). 

Sections 5, 6 and 8 of the Act govern the award of costs depending on whether the defendant was successful, convicted at first instance or if the matter proceeded to an appeal hearing.  Each of these sections are governed by a different statutory formula and are also subject to the Costs in Criminal Cases Regulations 1987.  The Regulations prescribe a statutory scale for awarding costs under the Act and set separate maximum limits for first instance and appellate hearings (presently $226 per half day for both first instance and appellate hearings).  In most instances this amount will not go far towards meeting even a small portion of the costs associated with defending a prosecution or appealing a decision (particularly with some of the more complicated legal issues that can arise in regulatory prosecutions).

It is possible however, under s 13(3) of the Act, for a Court to depart from the scale in circumstances where it is satisfied having regard to the special difficulty, complexity or importance of the case, that an award in excess of the prescribed scale is desirable.

In Field, Duffy J focussed in particular on section 13(3) of the Act and determined (due to the deficiencies in the police investigation) that Mr Field was entitled to costs and that the real issue for the Court to determine was whether or not to award costs in excess of the scale.

In considering whether Mr Field met the test set out in s 13(3) of the Act, Duffy J referred to the decision of Tipping J in T v Collector of Customs (High Court, Christchurch, AP167/94, 28 February 1995) particularly page 2 of his judgment where he noted that:

The use of the word "special" when applied to the concepts of difficulty, complexity and importance means that it is not enough simply to say that the case was difficult, complex or important.  The necessary difficulty, complexity or importance must be such that it can be said to be significantly greater than is ordinarily encountered.

…The fact that the scale is miserable, indeed insultingly so, naturally leads a judge to strain to find sufficient cause to exceed the scale.  Any such tendency must be resisted, albeit with little enthusiasm.

Accordingly, s 13(3) requires a level of difficulty that is "significantly greater" than that already encountered under the Act (for example the factors set out in s 5(2) of the Act which include, inter alia, the failure to conduct an investigation in a reasonable and proper manner).  In Field, Duffy J considered that, notwithstanding that there was nothing of legal complexity about the appeal, there was a sufficient "special difficulty" in the way that the Police conducted the investigation that justified an award in excess of scale costs in favour of Mr Field.

The position in Field can be contrasted with that taken by the Court of Appeal in Delamere v Serious Fraud Office ([2009] 3 NZLR 94) where the Court considered that overall, notwithstanding the result (Mr Delamere was acquitted of charges under s 229A of the Crimes Act arising out of an immigration scheme he had devised), the SFO case had been strong.  The Court was not disposed to interfere with the decision of the trial Judge who had concluded that the "infelicities" in the SFO's investigation were not such as to make a costs award just and reasonable.  Although the Court recognised that the costs to Mr Delamere were high both in terms of his actual costs and in a reputational sense, these factors were properly considered by the trial Judge and no error in principle was identified in her approach.

Notwithstanding the result of Delamere, our recent experience in the context of regulatory prosecutions is that there is a growing willingness to import quasi-civil concepts into the determination of costs in criminal cases (including a departure from scale costs).  This departure creates the opportunity for a successful defendant to negotiate a more favourable cost outcome with the prosecutor in excess of scale costs (or conversely to negotiate costs as against an unsuccessful defendant if it seems likely that costs will be awarded to the prosecution in excess of the scale).  Given the risk that comments in a costs judgment could tarnish the "halo" of an acquittal, it is well worth exploring an agreement on costs with the prosecution outside the courtroom. 

Civil

Concerned by the costs and delays in bringing civil cases to a conclusion, the Rules Committee has recently proposed (amongst other things) to introduce new rules imposing a duty on civil litigation parties to comply with the High Court Rules.  The Rules Committee consultation paper seeks comments on the proposals by 7 May 2010 (more information is available at www.courtsofnz.govt.nz, or read the full text pdf here).

As drafted, the rules would require all parties to a civil proceeding to "conduct [the proceeding or interlocutory application] in a way that is consistent with the objective" of the rules.  That objective is "to secure the just, speedy and inexpensive determination of any proceeding or interlocutory application" in the High Court.  Duties on lawyers and counsel to take into account the duties imposed on the parties they represent, to assist the parties to comply with those duties, and to act at all times in a manner consistent with the purpose of the Rules, are also proposed.

The Rules Committee suggests the new rules should also non-exhaustively define the ways in which parties and counsel would meet their obligations, including expectations that parties define the issue(s) in dispute and confine evidence, as well as targeting issues such as strategic delay.

One proposal for enforcing compliance with the proposed rules is to penalise the parties for any breaches of their duties when the Court comes to consider costs awards.  The Rules Committee proposes to amend HCR 14.6, which deals with increased costs and indemnity costs, by stipulating that in making an order for increased or indemnity costs the Court may take into account any failure by or on behalf of a party to comply with the duty.  It is also proposed that in certain situations where a lawyer breaches their duty to assist, then costs fixed as either a contribution to the party's actual costs or on an indemnity basis could be ordered against the lawyer personally.

While any attempt to reduce the delay and cost of litigation is welcome, it remains to be seen whether these proposed changes would actually have the desired effect of reducing delay or generating better costs recoveries for successful parties.  The award of increased or indemnity costs is a matter of judicial discretion.  The proposed rules do not change this.  They simply introduce another factor the Courts may take into account when assessing whether to make an award of increased or indemnity costs.  It is not clear that the amendment would lower the bar for an award of increased or indemnity costs.  They may simply increase the number of applications for costs in excess of the scale.  These are already common due to the (not unreasonable) desire of successful parties to bridge the gap between actual costs and scale costs and the tendency, with the benefit of hindsight, to see an unsuccessful party's conduct as unreasonable or having contributed unnecessarily to the time or expense involved.

It is difficult to see the proposed rule change producing substantially different results from the principles in Westpac v Bradbury and Muir [2009] 3 NZLR 400 and Diagnostic Medlab Limited v Auckland District Health Board & Ors (HC Auckland, CIV-2006-404-4724, Asher J, 23 October 2009) in relation to indemnity and increased costs respectively.

Mr Bradbury had performed legal services for Westpac until the Bank ended their relationship in 2005.  His firm sued the Bank for damages alleging breach of a contractual obligation to retain the firm for so long as it continued to perform to the satisfaction of the Bank and meet certain obligations of loyalty.  The claim was originally for special damages of $13.9m but was reduced before trial to $5.415m.  In closing submissions in the High Court, counsel for Bradbury and Muir progressively abandoned each cause of action, from which Harrison J inferred that it recognised its case was hopeless.  Westpac claimed indemnity costs of $1.683m plus disbursements of $136,865 and, in the alternative, an award of increased costs.  The firm submitted that its liability should be limited to scale costs of $89,250 plus disbursements of $57,515.  Harrison J ordered the firm to pay $996,712 (being what he assessed to be a reasonable figure for the Bank's actual costs) plus witness expenses and disbursements of $60,917.25. 

The default position under the High Court Rules is that costs are awarded according to a scale which is intended to represent two-thirds of a notional daily rate set by the Rules Committee.  It is generally accepted that this daily rate does not reflect actual commercial rates in the major centres.  However, the Court has a discretion to increase scale costs or depart from the scale altogether by awarding the actual costs, disbursements and witness expenses reasonably incurred by a party (indemnity costs). 

After reviewing the law in other common law jurisdictions, the Court of Appeal summarised the principles applicable in New Zealand as follows:

• Increased costs:  The starting point is the rates set by the Rules Committee rather than the costs charged by Council to the successful party.  Increased costs may be ordered where there is a failure by the paying party to act reasonably; and
• Indemnity costs:  These may be ordered where a party has behaved badly or very unreasonably.  They are exceptional and require exceptionally bad behaviour.  The misconduct must be "flagrant".  While the Court of Appeal recognised that the categories in respect of which the Court may exercise its discretion to award indemnity costs are not closed, they include:
• making allegations of fraud knowing them to be false or making irrelevant allegations of fraud;
• particular misconduct that causes loss of time to the Court and other parties;

  • commencing or continuing proceedings with some ulterior motive;
  • doing so in wilful disregard of known facts or clearly established law;
  • making allegations which ought never to have been made or unduly prolonging a case by groundless contentions.

The Court of Appeal concluded that the firm's case was hopeless from inception and commenced and continued for an improper motive, namely to extract a financial windfall by abusing the process of the Court.  Because the case was hopeless from inception, the Court declined to distinguish between different phases of the proceeding and award less than indemnity costs for certain parts. However, it did not rule out that a staged approach may be appropriate in some cases. 

In the event, the Court of Appeal deducted over $686,000 from the figure claimed by Westpac to arrive at a figure for "actual costs, disbursements and witness expenses reasonably incurred", which highlights the important distinction between an indemnity for reasonable costs incurred, which is the most a Court may award in New Zealand, and true indemnity costs. 

Due to the Court of Appeal's decision on indemnity costs, it was not necessary to consider the approach to increased costs. 

The High Court's decision in Diagnostic Medlab Limited v Auckland District Health Board & Ors clarifies the inter-relationship between the High Court Rules and the Court's "overriding" discretion as to costs, where costs above scale are sought in a case which does not necessarily fit the criteria for increased or indemnity costs.

The Court of Appeal allowed Labtests' appeal from the High Court and quashed the orders made below.  It referred costs in the High Court back to that Court.

Labtests sought full solicitor-client costs or, in the alternative, increased costs or, in the alternative, costs on a Category 3 basis, being the highest costs category.  Labtests submitted that the Court had an overriding discretion as to costs which entitled it to take into account, amongst other factors, DML's ongoing conduct of laboratory services between the High Court judgment and the Court of Appeal judgment.

The Court held that, while the rules state that all costs matters are at the discretion of the Court, it does not follow that the Court has a general and unfettered discretion.  Instead, although the specific costs rules are stated to be subject to the Court's overriding discretion, the rules are the starting point.  The discretion is ancillary to the rules.  Asher J observed that the best approach was to first consider increased and indemnity costs under the Rules but at all times bear in mind the overriding discretion if there is an unexpected or unforeseen matter which cannot be fairly accommodated by the Rules.  Asher J held that the discretion did not allow the Court to take into account events that have transpired since the judgment.  That would mean that costs could reflect unproven losses allegedly arising from the delay between the judgment and the ultimate award of costs.  He considered the Rules distinguished between costs which relate to the proceeding itself (which are recoverable), and consequences of a judgment which is successfully appealed (which are not).

DML failed on two of its heads of claim in the High Court and on the other two heads of claim in the Court of Appeal.  However, being unsuccessful did not by itself provide the requisite irresponsibility for an award of increased costs.  Asher J observed:  "Failure, even failure by a considerable margin, does not as a matter of course warrant increased costs.  Even where a claim or defence is rejected as clearly unmeritorious, such as in a successful summary judgment or strike out, the practice of the Court is still to award costs on a scale basis, save in unusual circumstances". 

2009 saw the rather evocative concept of an expert witness "hot tub" continue to gain acceptance in the High Court: Commerce Commission v Cards NZ Ltd (HC Auckland, CIV-2006-485-2353 and CIV-2006-485-2693, Asher J and Dr Lattimore, 27 July 2009).  A "hot tub" is an alternative way of hearing from expert witnesses. 

Usually, expert witnesses give evidence in the normal way - direct examination, then cross examination and re-examination, of one witness, followed (possibly much later in the trial, especially where there are multiple parties) by examination and cross-examination of other witnesses.  In a hot tub procedure, however, all of the expert witnesses are called at the same time to give evidence, and are subject to procedures to encourage debate and "back and forth" between the experts.  Generally each expert gives a summary of that expert's evidence within a limited timeframe.  Each other expert may then comment on that evidence within a limited time.  Once each expert has been through this process, they are sequentially cross-examined.

There are undoubted advantages to the hot tub process: on complex matters of, say, economic evidence, the judge does not need to hear from experts sequentially, but is able to put responses from one witness to another witness to hear that witness's reaction.  There is an immediate juxtaposition of the experts' positions and a quicker distillation of issues.  There may also be time, and therefore cost, savings.  The judge, who is still supervising the process, is able to intervene to prevent any expert who is clearly dominating the process.

However, the process has its disadvantages.  The tight time limits and focus on dialogue can interfere with a defendant's right to lay out their own defence, call the witnesses they choose, and have a reasonable opportunity to elicit from them all the evidence they require.  Despite judicial supervision, an expert witness with experience of the process may dominate.  More retiring experts with equally valid expert views, who would do well in individual examination, may struggle to get their points across.  The process can make the expert evidence process unintentionally adversarial, with experts less willing to make principled concessions and doggedly to "hold their corner".  Depending on the number of experts, it could also become unwieldy. 

The Court was satisfied that the number of experts alone (in this case, eight) did not pose a problem.  Concerns were raised that certain experts might dominate the process or use it for advocacy.  The Court did not share those concerns.  The experts over-riding duty is to assist the Court impartially, not advocate for the party instructing them.  Experts who attempted to subject the process for advocacy could, if observed, "expect short-shift". 

Despite these shortcomings, the process is increasingly the rule rather than the exception in New Zealand competition law trials, as it is in Australia (the only other major common law country to use the process).  In principle, there is no reason why it could not be used more frequently in other complex litigation. 

A recent out of court settlement between the Commerce Commission and Beneficial Insurance Limited highlights the potential risks to the insurance industry of Fair Trading Act liability.

A media release from the Commerce Commission on 14 January 2010 suggests that insurance companies (and brokers) may be in breach of the Fair Trading Act if they impose policy conditions that have not been adequately disclosed to the customer. This seems to extend to limitations and exclusions contained in the policy but which have not been brought adequately to the attention of the customer at the time of sale.

Beneficial Insurance Limited offered a credit contract indemnity policy providing cover for motor vehicle and personal loan payments in the event of redundancy, sickness or injury. From 2006, people who made claims were only paid a percentage (from 20 to 90 percent of the payments) if they had received partial income from another source such as the Accident Compensation Corporation. However, in the Commission's view, certain aspects of the policy wording combined with statements on Beneficial Insurance's website meant that consumers were likely to expect that the full amount of payments would be covered. As part of the settlement with the Commission, Beneficial Insurance has acknowledged a possible breach of the Fair Trading Act and has agreed to pay the 44 affected customers a total of $37,000.

Graham Gill, the Commission's Manager of Fair Trading, said "Insurance Companies need to ensure that if there are limitations to a policy, these are clearly disclosed to consumers before they purchase the insurance.  Applying conditions that have not been adequately disclosed risks breaching the Fair Trading Act. Consumers need accurate information so they can make informed decisions about what type of insurance cover will be best for them. If the consumer is only made aware of these limitations after the insured event happens, it is too late."

The potential for insurers and brokers to be held accountable for representations made during the course of selling insurance policies is of course nothing new, but this investigation highlights an increasingly proactive approach by the Commission to investigate the insurance industry and the manner in which policies are sold to customers.

The appointment of ineffectual or, worse, "friendly" liquidators by shareholders and boards, particularly in the case of closely held companies, is sometimes an unfortunate side-effect of voluntary liquidation.  Two High Court decisions have shed light on the Court's approach to reviewing the appointment of a liquidator under the Companies Act 1993. 

In Fisher International Trustees Limited v Waterloo Buildings Limited (In Liquidation) & Ors (HC, Auckland, CIV-2009-404-006640, 12 November 2009), White J agreed that the "cautious approach" to the replacement of a liquidator adopted by Asher J in WHK (NZ) Limited v Retail Media Limited (In Receivership & Liquidation) (HC, Auckland, CIV-2009-404-003157, 16 July 2009, Asher J) is appropriate and should be followed in the context of an application for review of an appointment under s283(4) of the Act.  In the normal course, an applicant for an order appointing a replacement liquidator would need to establish on the balance of probabilities that the person who had been appointed did not have the necessary qualifications, experience, independent and impartiality, and should be replaced by a person who did satisfy these requirements.  If the evidence was particularly strong, and the need for an urgent decision was established, the Court might be persuaded to make orders on an application for an interim injunction (with or without notice).

Notwithstanding that White J found there was a factual foundation for the creditors' suspicion that the liquidator did not have the necessary qualifications, experience, resources, independence and impartiality , he considered the applicants had yet to demonstrate an "overwhelming lack of independence on the part of [the liquidator] or great urgency" and was not prepared to complete the review of her appointment under s 283(4) without giving her a proper opportunity to respond and be heard. He observed that:

the liquidator should normally have the opportunity to provide the Court with evidence of his or her qualifications, experience, resources, independence and impartiality. As Asher J noted in WHK (NZ) Ltd at [26], it would only be in a case where the lack of independence was overwhelmingly demonstrated and there was great urgency that a Court might make an order replacing a liquidator after a truncated hearing.

WHK (NZ) Limited v Retail Media Limited involved an application by creditors pursuant to section 241AA of the Companies Act 1993 (the "Act").  Section 241AA:

• limits the period in which a liquidator may be appointed by shareholders or boards to ten working days following the filing of an application by a creditor to have the company wound up; and  
• provides that the creditor who filed the application has the right to apply to the Court to have the appointment of a liquidator reviewed under section 283 of the Act. 

Historically, shareholders and boards had the right to appoint a liquidator at any time.  Creditors were usually only able to seek the removal of a liquidator at a creditors' meeting (which can be dispensed with by a liquidator) or if it could be shown that the liquidator had failed to comply with his or her duties under Part 16 of the Companies Act 1993. 

This provided a window of opportunity for "gaming", whereby the voluntary appointment of a liquidator could be deferred until just before the Court was due to consider a creditor's application for winding up.  If a "friendly" liquidator was appointed it would then be difficult in practice for the creditor to produce evidence of partiality in time for the scheduled hearing.  Creditors would then be forced to either live with the appointment or accept the added expense and delay of bringing a further application.

To date, most of the cases under section 241AA have dealt with the appointment of a liquidator outside the ten working day statutory period.  The Court has taken a robust approach to declaring appointments outside the ten day period invalid.  The Court has readily looked to Companies Office records to establish the timing of shareholder or board resolutions where plaintiff creditors have failed to produce sufficient affidavit evidence. 

In WHK (NZ) Limited v Retail Media Limited,the plaintiff creditors applied under section 241AA of the Act for orders removing the liquidators and appointing alternative liquidators in their place. 

Surprisingly, no guidelines are set out in either section 241AA or section 283 of the Act as to the basis upon which the review of a liquidator is to be exercised.  In WHK (NZ) Limited, the creditors relied on related case law to submit that where there is a "body of suspicion", whether in the end justified or not, but with some factual foundation on which suspicion may be built, then it will be justifiable to remove a liquidator.  In the end, the Court declined to express a final view.  It did, however, observe that:

Even on such an approach [body of suspicion], mere suspicion is not in itself enough.  There must be a factual foundation for the suspicion which could be expressed as there being a serious question to be tried as to whether the liquidators would properly carry out their duties, and show the requisite objectivity and independence. 

These cases provide a useful insight into what amounts to a sufficient factual foundation for review.  The Court will take a "cautious approach" which, as Fisher International Trustees v Waterloo highlights, may require very persuasive evidence that the liquidator does not meet the requirements of the Act.  This standard will be higher again where the liquidator has not had an opportunity to be heard. 

The new District Court Rules came into effect on 1 November 2009.  They represented a fundamental procedural shift in how claims for less than $200,000 are dealt with. 

The sweeping changes were intended to improve access to justice and recognise that:

• For claims less than $200,000, the costs of recovery are often disproportionate to the amount at stake.
• Less than 10% of claims filed receive a formal response.
• Of this 10%, only 5% go to trial.

The key changes included:

• Formal pleadings have been replaced by "fill in the blank" forms.
• Discovery as we know it has been replaced by "information capsules".  There is no obligation to disclose adverse documents.
• Court supervision is discouraged.  Interlocutory applications are subject to greater controls.  Many are not available without leave.
• Summary judgment will be rare.
• Assuming a claim is defended, once information capsules have been exchanged, a plaintiff must file a notice and pay an additional filing fee if it wishes to pursue its claim. 
• A judge or registrar then allocates the claim, either to a "short trial" or a judicial settlement conference.  If the claim is for less than $15,000 it will be allocated to the Disputes Tribunal.
• The short trial process is intended for claims which can be dealt with in one day, are uncomplicated or have small amounts at stake.  There are strict time limits on examination of witnesses and submissions. 
• If the claim is allocated to a judicial settlement conference but does not settle, the options are:

  • Simplified trial, where there are also limits on time and number of witnesses.
  • Full trial, which follows the High Court procedure.
  • Summary judgment.

The new rules should make it faster and more straightforward to bring cost-effective claims in the District Court and, so far, that has been our experience overall.  Information capsules and the focus on early settlement will frontload preparation and cost, requiring parties to get to grips with the strengths and weaknesses of their case quickly.  Claims that do not settle can be determined by a procedure commensurate with the complexity and size of the claim.  The simplified claim forms mean that, in many cases, it will not be necessary to instruct a lawyer until after a judicial settlement conference.  Claims which, under the old rules may not have been economic, can now be pursued more cost-effectively - up to a point at least.

There are, however, some teething issues.  For example, applications for injunctive relief (which must be brought under the "old" procedure) may not transition smoothly from the interim phase to the new procedure.

Click here for an overview of the new District Court procedure. 

© Russell McVeagh 2009. All rights reserved. www.russellmcveagh.com